Riaz Haq writes this blog to provide information, express his opinions and make comments on wide ranging topics.The subjects include personal activities, education, South Asia and South Asian community activities, regional and international affairs and US politics to financial markets and beyond. For investors interested in South Asia, Riaz has another blog called South Asia Investor at http://southasiainvestor.blogspot.com

Tuesday, March 6, 2012

Should Pakistan Ignore "Washington Consensus" on Free Trade?

East Asian experience has some important lessons for Pakistan as the country embraces the western prescriptions of democracy and free trade. It's particularly important to recall these lessons now in view Pakistan's decision to open unrestricted trade with India whose major industrialists like Tata and Birla have greatly benefited from protectionist policies to scale up and gain experience.

The East Asian nation of South Korea has become a great model of economic success for the developing world. Back in 1960s, its annual per capita income was around $80, less than half of Ghana's at the time. Today, it stands at $30,000, comparable to that of some wealthy European nations. For most of this period, the people of South Korea have ignored the Washington consensus, the western prescription on economy and politics, to achieve this miraculous progress.

In 1960s and 1970s, Korea was led by military ruler General Park Chung-Hee who put in place the policies which helped Koreans realize their great potential. President Park made huge investment in infrastructure, health and education. In addition, South Korean analyst Ha-Joon Chang says that the Korean government "practiced many policies that are now supposed to be bad for economic development: extensive use of selective industrial policy, combining protectionism with export subsidies; tough regulations on foreign direct investment; active, if not particularly extensive, use of state-owned enterprises; lax protection of patents and other intellectual property rights; heavy regulation of both domestic and international finance."

Pakistan, too, was ruled by a military dictator General Ayub Khan in a period labeled by Pakistani economist Dr. Ishrat Husain as "the Golden Sixties". General Ayub Khan pushed central planning with a state-driven national industrial policy. In fact, South Korea sought to emulate Pakistan's development strategy and copied Pakistan's second "Five-Year Plan".

"The manufacturing sector expanded by 9 percent annually and various new industries were set up. Agriculture grew at a respectable rate of 4 percent with the introduction of Green Revolution technology. Governance improved with a major expansion in the government’s capacity for policy analysis, design and implementation, as well as the far-reaching process of institution building. The Pakistani polity evolved from what political scientists called a “soft state” to a “developmental” one that had acquired the semblance of political legitimacy. By 1969, Pakistan’s manufactured exports were higher than the exports of Thailand, Malaysia and Indonesia combined. Though speculative, it is possible that, had the economic policies and programs of the Ayub regime continued over the next two decades, Pakistan would have emerged as another miracle economy."

South Korea's Chang has exposed the hypocrisy of the West by explaining that the "G7 was always remarkably reluctant to recommend these (South Korea's) "heterodox" policies and insisted that the "Washington consensus" package of opening up, deregulation and privatization was the right recipe for everyone. When confronted with the Korean case, Washington consensus supporters tried to brush it off as an exception. However, the history of take-offs in most of the G7 countries – especially Britain, the US, Germany, France and Japan – is far closer to the Korean model than is commonly thought. The "unorthodox" policies used by Korea and almost all of today's rich countries need to be seriously considered in any discussion on development options."

Since the great success achieved by South Korea and other Asian Tigers in the latter part of the 20th century, China has become the latest example to have followed the East Asian development model with great results for what is now being dubbed the Asian century. Each of these nations has done it by ignoring the Washington Consensus about democracy, free markets and free trade.

As Pakistan embarks on a new course in trade, it's important for its leadership to recognize the wide gap between the theory and practice of the "Washington Consensus" to effectively safeguard its economy, domestic industries and jobs for Pakistanis to develop and prosper in the 21st century.

'visionary like Nehru or Park Chung hee at the top.'To compare Nehru to Park Chung Hee is a bit of a joke...Nehru's list of failures is long but the main one is that in his fanatical and blind obsession with a socialist system, he condemned millions of Indians to remain in absolute poverty. It was certainly not about sacrficing 'luxuries for future gain': in Nehronomics, India would have been left in permanent sacrifice. It required the threat of bankruptcy to cleanse India of some of Nehrunomics. It still hasn't been cleansed well enough though, which accounts for the woes that Mr Haq gleefully keeps on parrotting over and over again.

South Korea,Taiwan,Japan could get away with blatantly mercantalist trade policies because they were on the frontline against communism and the west had other priotities back then so treated them with kid gloves.

Mercantalism obviously is the best model IF you are allowed to get away with it.The point is people have wisened up and S Korea type modernization is basically impossible in todays enviornment.

Chinese growth is stalling as it is simply too big to export its way to prosperity on a per capita basis the world economy is simply too small for China to be exporting as much as south korea as % of GDP when its income approaches 25,000 USD per capita.

@Anonymous: We don't have much of an industrial base unfortunately. To have stifled private enterprise and invested millions in a handful of heavy industries which kept on producing shoddy goods was among Nehru's crimes. And because of that misplaced zeal for the 'temples of modern India', we ended up neglecting basic infrastructure which is why we continue of have this mass of the illiterate, hungry and poor. What is required today is to throw off the yoke of Nehru and Indira and Rajiv and indeed, that entire dynasty.

In the context of the examples that you provide and in my own humble opinion, i fully support the idea of the "east asian development model", so to speak.

This is beginning to make more sense, especially in the indian context. The idea of democracy is proving to be more of a burden than an enabler.

The multitude of voices only creates chaos. Debates and discussion are passed off as an excuse of tangible action.

In the indian context, add to this - the federal structure of governance, vested interests of the regional political parties, and undermining of the authority of the centre - and voila...we have the perfect recipe for policy paralysis.

A regime which practices democracy right down to the letter, I feel, is the answer, but also unlikely. The limitations that regional politics imposes, is fast threatening the Indian growth story and making the double digit growth figures all the more elusive.

Thank you for the input on the question of trade with India, a clear cut recommendation was not visible.

What ever I have learned from various discussions on the TV on this subject, it shows that the Indian goods are reaching Pakistan through a third country where they are exported by India and labelled as Made in Taiwan or Singapore etc, but in the process Pakistan ends up paying 20 to 30% extra to cover profits of two countries, India and the third country, plus significant additional amount for freight etc.

So what is the harm in importing these same items directly from India and save 30%, without increasing India's profit or sale, in this process we will be able to sell some things like cement etc to the large Indian market.

Tahir: "Thank you for the input on the question of trade with India, a clear cut recommendation was not visible."

I am not against trade with India or anyone else for that matter.

But it's naive to go into it with the orthodoxy of the Washington Consensus that there are only benefits and no downsides for Pakistan.

Rather than being motivated to engage in free trade as a matter of faith, Pakistanis need to learn to play this game of trade artfully to their advantage, as others like East Asians and Europeans have done.

At a minimum, Pakistan should implement MFN trade with India to ensure it's a win-win for the long-term, not a win-lose proposition.

Vicks: "We don't have much of an industrial base unfortunately. To have stifled private enterprise and invested millions in a handful of heavy industries which kept on producing shoddy goods was among Nehru's crimes"

Regardless of Nehru's many flaws, I would give him credit for laying the foundation of India's eventual economic success by doing the following:

Here's a report about the process South Korea is using to protect its industries before deciding on FTA with China:

South Korea plans to fully consider potential fallout for "sensitive industries" that may be hurt if a free trade agreement (FTA) with China is reached, a senior government policymaker said Friday.

Trade Minister Park Tae-ho said in a meeting with large industrial organizations that the government plans to do all it can to reflect the views of local manufacturers and the farming sector in formal FTA talks with Beijing.

"Every effort will be made to constantly listen to the opinions of farmers, fishermen and businesses that may be affected by market opening," he said.

The official said that with China’s domestic market growing at a robust pace, there is a pressing need to formulate a strategy to capture market share ahead of increased competition, hinting that a FTA will give South Korea an extra advantage.

Related to the stance by the trade minister, Lee Dong-geun, the vice chairman of the Korea Chamber of Commerce and Industry, pointed out that China is already the world’s No. 2 economy and the largest importer of South Korean goods.

"In the medium to long term, a South Korea-China FTA is inevitable," he claimed.

The business group leader, however, stressed that Seoul must try to win concessions from China in certain sectors that are vulnerable such as the farming and industries currently dominated by small and medium enterprises (SMEs). SMEs generally do not have the competitiveness of big conglomerates like Samsung and Hyundai, and could be hit hard if cheaper priced products pour into the country.

At the same time, Lee said negotiators need to get China to open its service and government procurement markets, as well as address non-tariff barriers and other complications, and administrative red tape that have hindered investments.

Other business groups such as the Korea Automobile Manufacturers Association, the Korea Association of Machinery Industry and Korea Federation of Textile Industries concurred on the need for a FTA, yet called for various safeguards.

They called for special safeguards to legitimately stem sudden surges in cheap imports and measures to prevent unfair trade practices such as illegal undercutting of goods prices that can distort the market and hurt local firms.

3. Emasculating the powerful landowners to marginalize their power & influence in Indian politics.

POINT 2 AND 3 are because the Industrialists financed the Congress party and the feudals(both indu and Muslim) were pro British.Which is why the congress party broke the back of natural 'traitors' which was agenda #1.Lots of rank and file congress members had personal axes to grind against the feudals.Which is why in most Hindi movies feudals/zamindars are always shown in a bad light.

He did not support the industrialists out of some grand vision but the neessity of financing the congrss party machinery.

His commanding heights theory favoured large public sector companies many of which were a drag on the Indian economy.He explicitly BANNED India Inc from defence due to his fears of a military industrial complex forming and subverting democracy blah blah.He was a bit too much of a thinker you see.

Also absurd situations occured due to his fabian socialist mistrust of private capital.He banned highly competent companies like L&T and Tata from entire sectors like defence and instead reserved these for DRDO's infamously incompetent companies the result is we import massive amounts of arms from western private companies but disallow our own world class corporations for doing the same.

Though that is changing(at last!).The hull of our nuclear submarine is made by L&T and the Combat management system is made by TATA advanced systems.

This is basically their first major defence project and it is on time and under budget!Just imagine the success if they were involved similarly in everything else!

According to EIU, Pakistan and to a lesser extent India have hurt their economies directly as a result of the hostile relations and lack of trade.

Since independence, Pakistan's GDP took a hit of 1% per year which roughly means each Pakistani would have been 80% richer than what he is today. India on the other hand suffered a hit of 0.25% per year which indicates average Indian would have been 20% better than today.

Here are some excerpts of a Jang story on the impact of Pak-China FTA on Pakistani industries:

An analysis of mutual trade statistics reveals that since the signing of Free Trade Agreement (FTA) between the two countries in Nov 2006, China has exported goods worth around $ 11 billion whereas Pakistan’s exports could hardly reach $ 0.25 billion.

Another misbalance in this respect is that Pakistan imports about 1,000 items from China while the latter’s export-basket is limited to hardly 50 items. Pakistan exports items like seafood, cotton yarn, leather, marble, fruits, sports goods, rice, raw hides and vegetables. On the other hand, China exports almost every thing available under the sun to Pakistan and that also at very low prices. Mass availability of these goods at low rates has pushed local industry out of competition.

Pakistan’s local industry alleges that the absence of government patronage and lack of supporting infrastructure, like energy, water, roads, has spurred import of cheap Chinese goods into Pakistan. Industrialists say China dumps a lot of goods into Pakistan but no action is taken for various reasons. The biggest of these is that Pakistan does not want to take even a symbolic step that harms friendly relations between the two, they add.

Complaints about dumping have to be filed with the World Trade Organisation (WTO) which inquires into them. "Dumping means export of goods by a country at prices lower than those at which these goods are being sold in the exporting country’s local market," says Tahir Fayyaz, a garment importer based in Karachi. He says such countries manufacture products in excess of their local demand to benefit from economies of scale and dispose off the surplus in countries where similar industry is in a stage of infancy or on a decline.

The countries dumping goods in other countries are not worried about the price at which they are exporting them as they earn sufficient revenues from collective sales. Tahir adds that many industrialists have shut down their units and turned to imports. "This is a hassle-free business where you do not have to tackle officials of dozens of departments, as is the case with industry," he says.

The question that arises here is how Pakistan can increase its share in mutual trade and boost its industrial sector’s contribution to exports to China. Critics say Pakistan should not shy away from raising dumping issues with China. However, this is something difficult, keeping in view the dependence of Pakistan on China in almost every field of life, ranging from education, technical assistance and engineering to defence, energy, and what not.

India, on the other hand, has still not signed free trade agreement with China and imposed anti-dumping import duties on yarn, fabric, nylon being imported from China. The country even has a Directorate General of Anti-dumping and Allied Duties (DGAD) which functions under the Commerce Ministry. The fact that India has filed a record number of anti-dumping cases against China at the World Trade Organization (WTO) also explains how protectionist the former is of its industry.--------The report says out of a total of five units, four have closed their commercial operations. These are Prey China, Dada Bhoy, Pakpur, and Regal China while the last one -- Lone China -- is on the verge of collapse. It adds the price of imported Chinese crockery has gone down drastically during the last one year, despite the fact that there has been no significant change in the cost of inputs...

Here's an LA Times Op Ed on US democracy groups working in developing nations:

Now that seven American pro-democracy workers have been allowed to post bail and return to the United States, perhaps we can examine what the U.S. was up to in Egypt using reason instead of patriotic emotion. The Egyptian furor over such seemingly idealistic work may strike us as wild and idiotic, but in fact, the Egyptians have a right to be suspicious. America's attempt to promote democracy around the world through private organizations has unsavory beginnings and a sometimes troubling history.

The program stems from a discredited CIA operation. In the 1950s and '60s, during the Cold War, the CIA set up a group of phony foundations to funnel CIA money to private groups that were either anti-communist or, at least, non-communist. Among the recipients were the AFL-CIO, the National Student Assn. and the magazines Encounter in London and Transition in Africa. Some did not even realize they were operating with CIA subsidies. When the secret operation was exposed in Ramparts magazine and other U.S. publications, there was great embarrassment, and President Lyndon Johnson put a stop to such CIA funding.

But many in Congress felt that the program's problem lay only in its ties to the CIA. Cut those ties and make everything aboveboard, they argued, and the attempt to win hearts and minds to the American way would be useful and benign. In the 1980s, during the Reagan administration, Congress created the National Endowment for Democracy to take the place of the defunct CIA program.

Under the law, the endowment divided its money among four new institutes created to sponsor programs encouraging democracy throughout the world. The four institutes were run by the Republican Party, the Democratic Party, the AFL-CIO and the U.S. Chamber of Commerce, supposedly ensuring the participation of the major American ideologies and interests.

While the Indian officials and business circles are pleased with Pakistan’s decision of extending the MFN status, it is not clear how mindful the Indian side is of the genuine fears in Pakistan about serious damage to our economy from a rapid increase of imports from across the border. As we lower trade barriers, there will be numerous complaints against the dumping of cheaper Indian goods. Our exporters will be exasperated by India’s non-tariff barriers. Therefore, the increase of Indian exports and the absence of corresponding growth of our exports to India would only sour the atmosphere. Is there any point in liberalising trade if that would lead to frustration, rather than bringing the two countries closer? Misgivings notwithstanding, the answer would still be yes, because dismantling trade barriers is the way of the future while keeping the barriers is considered regressive and outdated.

The avalanche of Indian movies in Pakistan or the roaring success of Pakistani singers in India has not helped in changing hearts on the two sides. India still refuses to play cricket with Pakistan for political reasons. The Pakistanis may be taking Bollywood in their stride, but the flooding of Indian goods is going to be a different ballgame. The role of Pakistan’s film industry in the country’s economy cannot be compared with that of the textile, automobile or pharmaceutical industries. We will have to create efficient monitoring systems to ensure that injury to Pakistan’s industries leads to restrictions on cheap imports. Punitive measures will need to be supported by technical dossiers. The complex non-tariff barriers cannot be overcome by the existing bureaucratic structures. The government, the TDAP and our industries will have to hire business experts and lawyers to make sure that our answer to dumping is not only symptomatic but based on hard irrefutable data.

Barring unforeseen developments, from 2013 onwards Pakistan-India trade will be moving in the fast lane. In other words, we would be not only seeing a rapid growth of trade but also experiencing tit-for-tat safeguard measures already being practiced by many other countries and trade blocs of the world. Europe, which saw some of the most horrendous wars in history, became a pioneer in peaceful coexistence and economic integration after World War II. The Europeans are often urging India and Pakistan to follow suit by forging economic links and making South Asia a free trade area. Presently, all this may sound like utopian thinking, but at least a beginning is being made through the opening up of direct trade between South Asia’s two largest yet very disproportionate economies. In order to ensure that we are in a win-win situation, it depends more on the bigger country to provide a level playing field to the smaller partner. If that becomes unachievable, the flurry of trade generated by reciprocal MFN status may soon end up in a trade war of sorts between India and Pakistan.

A SAARC FTA will resemble NAFTA a lot more than the EU in europe Germany,France,UK are roughly the same size with Italy,Spain about 50% of these thus self balancing.

In S Asia India is 10 times the size of Pakistan and growing 3 times faster.

Also and this is not PC Europeans are all white Christians (look at the way they keep refusing Turkey admission) Is India seriosuly ready to share its economic gains with muslim neighbours? or tie its economic fate with their success or failure?

I think not.Though by the time the FTA with India gets finalized the Chinese would have wiped out Pakistan's light industry anyway so in that way I don't see any extra harm that can be done to PAkistan by India.

KARACHI, Pakistan -- Iran and Pakistan are negotiating a barter deal in which Pakistan would supply up to 22 million tons of wheat in return for discounted electricity and petroleum products, Pakistani business leaders involved in the talks said.

The proposal is part of a broader trade package being pursued by the neighboring states as Iran scrambles to find new suppliers to replace trading partners scared away by U.S. sanctions that have made it increasingly difficult to trade with Tehran.

While Iran and Pakistan haven't been major trading partners historically, economic ties between the two nations are growing stronger - particularly with the construction of a pipeline to carry Iranian natural gas to energy-starved Pakistan, a project scheduled to be completed by the end of 2014.

The Pakistani government has vowed to go ahead with the pipeline project - despite repeated warnings from Washington that it would violate U.S. sanctions - because its economy has been hamstrung by major shortages in electricity and gas supplies.

Pakistan's enhanced ties with Iran have irked U.S. officials and contributed to tensions between Washington and Islamabad, impeding U.S. efforts to enlist Pakistan's help in finding a peace deal in neighboring Afghanistan.

Iran is locked in a confrontation with the United States and Western powers over its nuclear program, which the West says is aimed at developing a nuclear weapon, while Iran insists it's for peaceful purposes. Since the imposition of harsher U.S. and European sanctions in recent months - aimed at choking off Iran's international oil sales - Iran has offered energy products to Pakistan on increasingly softer terms.

Having completed its section of the natural gas pipeline, Iran has offered Pakistan the $250 million it needs to finance its section. Tehran also has offered to increase oil exports to Pakistan while deferring payment - a favor Pakistan's major suppliers, Saudi Arabia and Kuwait, have declined to grant - and has proposed to pay for Pakistani food exports with discounted electricity and petroleum products.

--------------Zardari is seeking to expand the arrangement to include Turkey, a major Iranian trading partner, as part of a push to build regional trading blocs within Asia.

Much of the envisioned expansion in Pakistani trade with Iran is likely to be conducted as barter, with prices based on dollar-denominated international commodity rates, the business leaders and banker said.

That's because Iran's political troubles would translate to discounted terms for their Pakistani trading partners. The arrangement would be viable for Iran because it plans to use imported Pakistani commodities as raw materials for its manufacturing sector to produce value-added goods, they said.

The Pakistani business leaders said smugglers would cash in on the opportunities generated by U.S. sanctions, whether legitimate businesses did or not.

"There is already considerable informal trade between the two countries, especially in cheap petroleum products, because of the shared land border," said Zulfikar Thaver, president of the union of small and medium enterprises. "The authorities on both sides privately condone it because it helps redress domestic imbalances in supply and demand."----------The proposed trade is too massive to be conducted by road, so Pakistani wheat exports would have to be carried by ship. But freight insurance has become more difficult to obtain because the private clubs of ship owners that tend to provide that insurance are beginning to shy away from Iran-bound cargoes, fearing the impact of further U.S. and European sanctions.

Here are excerpts of an Express Tribune by Dr. Ishrat Husain on investments & rule-of-law:

Growth rates in Pakistan since 2008 have declined to almost half of the level achieved in the preceding four years. The investment ratio in 2010-11 has been the lowest in the history of Pakistan. Most of the discussion on the stagnation and decline of the economy has rightly focused on fiscal deficits, energy shortages, inflation, and high interest rates. But the relationship between the rule of law and investment and business development is not much talked about in popular discourse. In the absence of a conducive legal environment, uncertainties created by other factors such as political instability, security, law and order, energy, etc., would make matters worse. But a well-functioning judicial system can reassure the investor and act as a countervailing force to these other negative attributes. An investor will part with his financial savings and share his expertise and experience only when he is assured that the firm will make profits. To achieve this, non-discriminatory and impartial application of law, enforcement of contracts, protection of property rights and speedy disposal of cases are necessary.-----------------While we all rightly criticise the informal jirgas, sardari practices and Qazi Courts, the fact remains that we have been unable to extract the essential ingredients of these informal systems and enrich the formal legal systems. The uprising in Malakand Division was inspired by the mullahs who contrasted the speedy and expeditious justice of the Shariah Courts in the days of Wali of Swat, with the established judicial system applied in the area since the merger of Malakand in the province of Khyber-Pakhtunkhwa. ---------Access to judiciary is limited to only those who can afford good lawyers and pay their enormous fees and expenses. Unequal access to justice is one of the main factors that perpetuates the patronage capacity of politicians and, in turn, leads to poor economic governance. Feudalistic ethos that pervades our governance structure cannot be altered until all citizens are treated equally by law. Today, it is only the rich who can manipulate the system to their advantage.-----------As one of the leading Pakistani lawyers has so aptly commented that the English model –– on which the Code of Civil Procedures (CPC) 1908 was based –– was discarded even in England, a long time ago. The English model “preferred form over substance on account of this fundamental flaw, litigations continue in Pakistan for decades while lawyers squabble over issues of virtually no consequence. In each litigation there is a lawyer seeking justice for his client and an opposing lawyer who will very successfully prolong and delay the litigation, while liberally drawing upon various dilatory provision of CPC. Knock outs on the basis of hyper-technicalities and the causing of abnormal delays are, in fact, appreciated and considered ‘assets’ and ‘qualities’ of astute lawyers.”

A recent book "The Growth Map" features Goldman Sachs' Jim O'Neill's personal account of the BRIC phenomenon, how it has evolved, and where those four key nations currently stand after a turbulent decade.

And the book also offers an equally bold prediction about the "Next Eleven" countries: Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey, and Vietnam. These developing nations may not seem exceptional today, but they offer exciting opportunities for investors over the next decade, just as BRIC did before them.

Here's an excerpt of Farrukh Saleem Op Ed in The News on Indian military buildup being aimed at Pakistan:

According to a report by Stratfor, the Texas-based private intelligence agency, “China has been seen as a threat to India, and simplistic models show them to be potential rivals. In fact, however, China and India might as well be on different planets. Their entire frontier runs through the highest elevations of the Himalayas. It would be impossible for a substantial army to fight its way through the few passes that exist, and it would be utterly impossible for either country to sustain an army there in the long term. The two countries are irrevocably walled off from each other. Ideally, New Delhi wants to see a Pakistan that is fragmented, or at least able to be controlled. Toward this end, it will work with any power that has a common interest and has no interest in invading India.”

On March 16, Pranab Mukherjee, India’s Finance Minister, jacked up India’s defence budget by a wholesome 17 percent-one of the sharpest ever jump over the past 65 years. The defence allocation now stands at a colossal $38.6 billion up an alarming 350 percent in rupee terms since 1999.

The Indian Air Force (IAF) is upgrading its entire fleet of 51 Mirage 2000s. IAF has already assigned the nuclear strike role to its ‘Vajra’ fighter jets and now the fleet is getting “new RDY-3 radars with greater air-air and air-ground capability, a new night vision compatible all-digital cockpit and improved electronic warfare systems.” Then there is a hefty $20 billion in the new budget for 126 Rafale twinjet combat aircraft for “high-accuracy strikes and nuclear strike deterrence.” There also is $4 billion for an artillery modernization programme that includes 145 ultra-light howitzers for India’s mountain divisions stationed opposite Pakistani borders.

India has six neighbours-Pakistan, Bangladesh, Bhutan, Burma, Nepal and China. Pakistan’s defence spending stands at $5.16 billion, Bangladesh $1.137 billion, Nepal $100 million and Burma $30 million. Collectively, Pakistan, Bangladesh, Burma and Nepal spend $6.5 billion a year on defence. India just by itself now spends a colossal $38.6 billion on defence. Who is India going to fight with?

Bharatiya Sthalsena (the Indian Army) already has 3,773,000 troops plus 1,089,700 paramilitary forces and is second only to China in size. IAF already has 1,700 aircraft and is the world’s 4th largest. The Indian Navy already operates some 13-dozen vessels with INS Viraat as its flagship, the only “full-deck aircraft carrier operated by a country in Asia or the Western Pacific, along with operational jet fighters.”

On the ground, Bharatiya Sthalsena has a total of 13 corps of which 6 are strike corps. Of the 13 corps more than half have their guns pointed at Pakistan. The 3rd Armoured Division, 2nd Armoured Brigade, 4 RAPID, Jaisalmer AFS, Utarlai AFS and Bhuj AFS are all aiming at splitting Pakistan into two (by capturing the Kashmore/Guddu Barrage-Reti-Rahimyar Khan triangle).

For the record, the 2011 Global Hunger Index (GHI) Report ranked India 45th amongst leading countries with hunger situation. According to the United Nations Development Programme 37.2 percent of Indians live below the national poverty line. Amazingly, poverty is so deep-rooted that India alone has 33 percent of world’s poor.

India will explore a route through rival Pakistan to transport iron ore from Afghanistan, the head of a consortium involved in the $11 billion project said, hoping that economic benefits will outweigh political hostility.

Despite a spike in tension in Afghanistan and uncertainty over the future once foreign combat forces leave in 2014, India was committed to developing the Hajigak mines and a 6 million tonne steel plant alongside, C. S. Verma, chairman of Steel Authority of India, told Reuters in an interview.

A contract is to be signed in two months in what will be the biggest foreign investment in Afghanistan's resources sector, larger than the $4.4 billion the Chinese are investing in the Aynak copper mine.

Mining work is expected to begin in late 2014 just when Afghan security forces take over security responsibilities and it remains a big concern whether they will be able to tackle a Taliban insurgency at its worst.

For the Indians, the challenge of transporting the ore out of the landlocked country is an additional issue given they have no direct access.

Pakistan is the obvious route and the alternative is a longer way westwards to Iran and then shipping it through the port of Chabahar that India has promoted to reduce Afghanistan's dependence on Pakistan.

But Verma told Reuters that the consortium made up of seven state and private firms was looking to move the ore along Pakistani roads crossing over to India, believing the benefits far outweighed political hostility between the two countries.

"What we have here is a gold mine, more than just an iron mine. I believe this is what everyone else will eventually realise. Ultimately the economic interests of everyone in the region including Pakistan will take precedence".

The Hajigak deposit contains an estimated 1.8 billion tonnes of ore, with an iron concentration of anything between 61 percent to 64 percent. "Where will you find such high grade ore? People have invested in mines elsewhere in the world with much less ferrous content," Verma said.

India, he said, would pursue the Pakistani option both as a way to truck the ore out and a route to build a slurry pipeline. "We are very bullish and believe that over the longer term this will be a productive investment. Not just for us, but others in the region including Pakistan. There are license fees, logistics, etc."..

Here are excerpts of an Op Ed in The Atlantic titled "The White Savior Industrial Complex"By Teju Cole:

What Africa needs more pressingly than Kony's indictment is more equitable civil society, more robust democracy, and a fairer system of justice.--------------1- From Sachs to Kristof to Invisible Children to TED, the fastest growth industry in the US is the White Savior Industrial Complex.

Teju Cole @tejucole

2- The white savior supports brutal policies in the morning, founds charities in the afternoon, and receives awards in the evening.

Teju Cole @tejucole

3- The banality of evil transmutes into the banality of sentimentality. The world is nothing but a problem to be solved by enthusiasm.

Teju Cole @tejucole

4- This world exists simply to satisfy the needs—including, importantly, the sentimental needs—of white people and Oprah.

5- The White Savior Industrial Complex is not about justice. It is about having a big emotional experience that validates privilege.

Teju Cole @tejucole

6- Feverish worry over that awful African warlord. But close to 1.5 million Iraqis died from an American war of choice. Worry about that.

Teju Cole @tejucole

7- I deeply respect American sentimentality, the way one respects a wounded hippo. You must keep an eye on it, for you know it is deadly.

These tweets were retweeted, forwarded, and widely shared by readers. They migrated beyond Twitter to blogs, Tumblr, Facebook, and other sites; I'm told they generated fierce arguments. As the days went by, the tweets were reproduced in their entirety on the websites of the Atlantic and the New York Times, and they showed up on German, Spanish, and Portuguese sites. A friend emailed to tell me that the fourth tweet, which cheekily name-checks Oprah, was mentioned on Fox television.

These sentences of mine, written without much premeditation, had touched a nerve. I heard back from many people who were grateful to have read them. I heard back from many others who were disappointed or furious. Many people, too many to count, called me a racist. One person likened me to the Mau Mau. The Atlantic writer who'd reproduced them, while agreeing with my broader points, described the language in which they were expressed as "resentment."

This weekend, I listened to a radio interview given by the Pulitzer Prize-winning journalist Nicholas Kristof. Kristof is best known for his regular column in the New York Times in which he often gives accounts of his activism or that of other Westerners. When I saw the Kony 2012 video, I found it tonally similar to Kristof's approach, and that was why I mentioned him in the first of my seven tweets.

Those tweets, though unpremeditated, were intentional in their irony and seriousness. I did not write them to score cheap points, much less to hurt anyone's feelings. I believed that a certain kind of language is too infrequently seen in our public discourse. I am a novelist. I traffic in subtleties, and my goal in writing a novel is to leave the reader not knowing what to think. A good novel shouldn't have a point. ....

Mr. Singh met Pakistan Prime Minister Yousuf Raza Gilani briefly on the sidelines of a nuclear summit in Seoul on Tuesday. He told reporters Wednesday that he’d thanked Mr. Gilani for recent trade concessions and offered to make an official visit to Pakistan.

“I had a good meeting with him. I thanked him for the trade concessions that they have announced. He said when are you coming there (Pakistan). So, I said let us do something solid so that we can celebrate,” the Press Trust of India quoted him as saying. Mr Singh also said he told M. Gilani that he would “look into” the Pakistani leader’s request for India to supply power.

The chumminess of this encounter is likely to annoy India’s Pakistan hawks, who see no reason to make gestures toward Pakistan. Islamabad has failed to push ahead with the trials of the seven men it has charged with attacks on Mumbai in 2008 which killed more than 160 people and should be shunned until it does so, they argue.

Mr. Singh has taken a different approach.He invited Mr. Gilani to watch a World Cup cricket match between India and Pakistan a year ago, an act which sparked hopes of cricket diplomacy.

Although no breakthroughs have happened on the big issues that bedevil relations, like over the disputed Himalayan region of Kashmir or what India says is Pakistan’s continued support of militant groups, India and Pakistan have edged forward in recent months on other, smaller issues, like trade.

Last month, Pakistan agreed to normalize trade with India by the end of the year, a move which is part of a strategy to build confidence without yet touching issue like Kashmir.

This is a strategy dear to Mr. Singh’s heart. He’s said in the past that building economic ties with Pakistan is crucial to achieve peace but also to give India access to trade through Central Asia and beyond.

But the focus on trade has angered some in India, who see it as obfuscating the goal of getting Pakistan to crack down on militant groups. In Pakistan, too, there has been some opposition to normalizing trade with India. Mr. Gilani told Mr. Singh getting domestic support for the move was not “entirely easy,” PTI reported.

Here's an excerpt from an Op Ed by LUMS professor Ijaz Nabi as published in The Hindu:

Anglo-Russian rivalry and the long Chinese slumber cut off the land routes and markets to the West and the North, and Pakistan-India disputes truncated the routes to the East. Independent Pakistan invested heavily in infrastructure and trade along the North-South corridor via Karachi replaced trade across land borders. For the first time in history, Pakistan's three historical regional centres achieved a high degree of connectivity defining an Indus Basin market across the length of modern day Pakistan.

The Indus Basin market that spurred growth rates of 6 per cent or more for several decades has now run its course. Pakistan thus has to create a new “vent” for long-term sustained economic growth that is regionally balanced. This requires reverting to geography and history.

Pakistan lies at the heart of a rapidly transforming world around its land borders. To the North and East are the skills and savings-rich economies of China and India with a combined population of over 2 billion growing at 8 per cent or more. To the West are resource rich Central Asia, Iran and the Persian Gulf states. Reopening the historical East-West-North trade routes and linking them with a strong North-South corridor will make Pakistan the trade hub of South Asia. And trade hubs, that lower cost of transporting materials and people, are precursors of industrial hubs that produce sustained economic growth.

This is the strategic vision that should guide Pakistan's trade relations with all its neighbours, including India, and not the short-term cost-benefit analysis of the impact of liberalisation on some niche manufacturers.

And how should India lift up its game? All paths to economic development and prosperity do not have to be routed through sweat shops catering to affluent western consumers. A large and vibrant Asian regional market would constitute a significant and, given demographic shifts, growing part of global demand for products. India's long-term strategic interest is to help create that Asian market. That, in turn, requires strengthening Pakistan to be an effective regional hub that connects the Asia-wide market.

Here's an Op Ed in The Nation written by economist and author Dr. Kamal Monnoo:

While there is no denying the fact that Pakistan’s economic health, its global ratings and image per se are all taking a serious dent and, of course the recent (released in February 2012) IMF report on the state of the Pak economy notwithstanding, the reality also is that it has a very resilient and robust side that continues to surprise. A picture that depicts the glass to be at least half full, points to the sectors that are consistently growing and adding value and, more importantly, exposes the huge underlying economic potential which despite poor governance keeps taking the national economic activity to the next level. Amidst great adversities and serious financial challenges, there does exist a silver lining on how the economy has performed over the last 12 months and some of the positives going forward.

On the back of a slowly but surely evolving middle class, there exists a visible consumption boom in the economy where companies are going through a period when domestic sales have never been higher. An exceptionally high percentage of young employable youth is unearthing new dynamics, as these fresh minds strive to create their own opportunities, thereby unleashing a wave of innovative entrepreneurial benefits. For example, the quality and speed at which the Pak urban consumer and service sectors (fashion wear, eateries, home decor, healthcare centres, private education, beauty salons, leisure and entertainment etc) are growing has but a few parallels in the world.

The inflow of foreign exchange remittances by Non-Resident Pakistanis (NRP) has never been stronger and provided its current rate of growth does not stall, the government envisages that the final figure is well on course to touch the $18 billion per annum level. Add to this, the fact that our exports registered $25 billion in 2011 and the possibility that if we can somehow supplement these inflows from NRP remittances and national exports, by re-attracting the presently dried up Direct Foreign Investment, there actually exists a strong case for successfully balancing our current account status - Pakistan as we know (even with the oil prices are high) is an economy that traditionally imports between $35 and $38 billion per annum.

The reserves in the meanwhile have held their ground at around the $17 billion mark and when doing a regional comparative analysis on parity with the US dollar one finds that the Pak rupee has also fared better than most of its neighbours. In fact, against the European currencies, like the Euro and the Sterling, the Pak rupee has gained in value when comparing its parity during the pre- and post-European crisis periods.

Further, according to the latest data released by the FBR, the revenue collection this year is on target and is likely to cross the Rs2,000 billion mark for the first time in history. ...-------------Large Scale Manufacturing (LSM) has begun to turn the corner by registering a 1.50 percent growth from negative 0.80 percent in 2011, more than 1.50 million motorcycles were sold last year and Automobile Sector’s sales are about 30 percent above from the fiscal year 2004-05 (regarded by auto pundits to be their best year). Companies and banks in general have announced healthier profits with especially the consumer goods companies leading the pack by churning out some unprecedented results. This coupled with the new policy announcement on investment in the shares markets has given a boost to the stock markets with the KSE (Karachi Stock Exchange) Index climbing to near 14,000 points. If the returns can continue to be interesting, such an opportunity is bound to even lure back foreign investment into the Pakistani markets.

..Wayne Beeson, supporter of Expeditionary Economics and other entrepreneurial economics initiatives, spotlights and recommends in his blog the entrepreneurship-based Expeditionary Economics model for Pakistan and similar countries to stimulate and sustain economic growth. He explains that Expeditionary Economics was put forth by The Kauffman Foundation in 2010 as an alternative to the largely ineffective international economic development policies of the U.S. State Department for the purpose of developing economic growth in areas where the U.S. is involved in counterinsurgency missions or disaster relief. Economic growth is vital for the stability of countries challenged by war and disaster. Mr. Beeson agrees with The Kauffman Foundation that entrepreneur-led economies are a proven model for developing economic growth.

“Entrepreneurship positively impacts the economic well-being of individuals, families, and nations, and Expeditionary Economics recommends entrepreneurship as the foundation of our international economic development policy and endeavors,” says Mr. Beeson. He notes that Professor Looney’s study on applying Expeditionary Economics to the economy of Pakistan to stimulate economic growth is not only a model for Pakistan, but also a model for other countries facing similar challenges.

“Professor Looney’s study is the beginning of a plan of action to systematically implement entrepreneurial activity in a distressed economy in which the U.S. is committed to providing assistance for various reasons. If the U.S. can be successful in helping create prosperous, self-reliant economies, it is a win-win outcome. I individuals, families and nations prosper and support democratic reforms where the people of a country own their own economy and government, and the U.S. wins by having friends in the international community who support rather than threaten U.S., because they support our values and ideals,” explains Mr. Beeson.

Professor Looney’s paper can be downloaded at expeditionaryeconomics.org., or from this news release.

Here's a Council on Foreign Relations (CFR) blog on regional trade in South Asia:

South Asia is among the least economically integrated regions of the world, in part because partition cleaved apart various natural economic communities. Regions, such as Bengal, which had been well integrated historically, suffered considerable economic ill effects. And post-1947 policies have only exacerbated the problem through tariffs, production restrictions, and various trade controls.---------So it’s interesting that Indian foreign policymakers seem, in various ways, to be reemphasizing the economic dimensions of their country’s strategy. At a conference in New Delhi last week, for example, Shivshankar Menon, India’s savvy national security advisor, urged India and its neighbors to refocus on economic integration. Ironically, Menon argued, economic success has raised the costs of not doing business.---------

This is why it’s encouraging that Menon and others in India seem to be giving regional trade integration new emphasis. After all, India’s size and rapid growth give it some potential to help lead the way.

Here are three areas that bear watching:

The Strategic Consequences of Indian Growth

First, how will India choose to play the strategic consequences of its economic growth?

My friend, Sanjaya Baru, has long argued that India should work not just for India-Pakistan bilateral cooperation or regional cooperation within the South Asian Association for Regional Cooperation (SAARC) but also on a parallel track. Given the slow pace of the former two efforts, Sanjaya has written, “it may be necessary for India to … see if regional economic cooperation can be pursued at a faster pace in a wider South Asian context.”

One vehicle, he has argued, might be an expanded “Bay of Bengal Community.” This would build eastward off the platform of an existing effort, “BIMSTEC,” which involves technical cooperation among Bangladesh, Bhutan, India, Nepal, Sri Lanka, and two Southeast Asian countries—Myanmar and Thailand. And if Myanmar’s process of political opening ultimately proves to be real (and is matched by an economic opening), then India would be well positioned to help forge new patterns of integration between South and Southeast Asia.

Melding Economics into Indian Strategy

Now, flip from the strategic consequences of economic growth to the economic dimensions of Indian strategy.-----------Mohsin Khan of the Peterson Institute has argued that Pakistan’s November 2011 decision to grant most favored nation (MFN) status to India could prove especially significant. Of course obstacles remain, but Pakistan has continued to take important and constructive steps—for example, shifting from a “positive” to a “negative list”-based import regime with a February 29 Cabinet decision. India’s trade minister, Anand Sharma, has noted that this step will increase from 17% to about 90% the number of items that India can trade with Pakistan.

There has been movement elsewhere as well—with Bangladesh and Sri Lanka, for example. Over at Ajay Shah’s blog on the Indian economy, there is a good debate about whether and how India’s growth may have spillover effects elsewhere in South Asia.

The bottom line is this: India’s debate about economics and strategy is intensifying. And to my mind, at least, that is a decidedly good thing. After all, India’s success will increasingly depend on how New Delhi (and India’s states) respond to opportunities generated beyond the country’s borders.

It's an obvious question to ask at a time when powerful - and populist - regional parties are again flexing their muscles at a fickle federal government, key economic reforms are seemingly stuck in the bog of messy coalition politics, and the government is struggling under an avalanche of corruption charges. Economic growth and investment have cooled and inflation remains high.

So is it surprising that The Economist magazine, in its latest issue, says the politics is "preventing India from fulfilling its vast economic potential"?

Or when Fareed Zakaria, editor-at-large with Time magazine, tells an audience in Delhi this week that India's politicians are "out of touch… they try to portray India as a victim, not the victor".

With uncharacteristic exaggeration, The Economist even invokes a return to the stifling days of the controlled economy.

"Lately, like a Bollywood villain who just refuses to die, the old India has made a terrifying reappearance," says the magazine. It blames a "nastily divisive political climate" for the crisis and believes that India requires "energetic, active leaders, plus politicians who are ready to compromise".'Corrupt and corroded'

Both the magazine and the pundit are right and wrong.“Start Quote

Reformers need to be patient; there are no shortcuts in India”

The quality of India's politicians, many argue, has declined drastically, as in many parts of the world. Most of them seem to be out of sync with modern day realities - expectations have fallen so ridiculously low that an iPad carrying politician is described by the media as a modern one!

Most are also seen as greedy, corrupt and disinterested in serious reform. The increasing number of politicians with criminal records and the brazen use of money to buy party tickets and bribe voters erodes India's ailing democratic process.

It is not a happy picture. "Today the Centre is corrupt and corroded," historian Ramachandra Guha wrote recently. "There are allegedly 'democratic' politicians who abuse their oath of ofﬁce and work only to enrich themselves; as well as self-described 'revolutionaries' who seek to settle arguments by the point of the gun." Only serious electoral reform can ensure a better breed of politician.---------Public consensus is harder to come by in an awfully unequal society where the middle class and the rich root for further opening up of the economy, while the poor want the state to invest in health and education and check corruption. The elitist biases in public policy is made easier by a poorly-informed and often unlettered electorate with low expectations.

Many would argue that India never got any magic going, so there is no question of losing it.

Consensus is painfully slow in such a society, and sometimes only a crisis can provoke the government - and the people - to bite the bullet. Reformers need to be patient; there are no shortcuts in India.

Pakistan will soon get the generalised system of preferences (GSP) plus status from the European Union, which will ensure 80 percent of the local items get duty-free access to the 27-country family market, an official said on Friday.

Federal Commerce Secretary Zafar Mehmood in a meeting with the business community at the Islamabad Chamber of Commerce and Industry (ICCI) said that in the next few months the parliament will promulgate the Trade Organizations Ordinance 2007.

“The private sector is the engine of economic growth and the government would not implement the free trade regime without ensuring level-playing field for its exporters. All decisions regarding negative lists would be made keeping in view the national interests, as the World Trade Organization’s (WTO) trading arrangements also provide trade defence measures in case of unfair trade practices or any threat to the local industry.”

ICCI President Yassar Sakhi Butt said the chambers and the business community should be taken on board in the budget-making process.

It should also give weightage to the proposals that are submitted by the chamber and associations instead of taking unilateral decisions, he said.

The Ministry of Commerce in collaboration with the Ministry of Industries and industrial zones should conduct a study to find out those industries that were really vulnerable in post-MFN scenario, establish their database and support them with the subsidised utility rates for three-four years so that they could come out of vulnerable situation and compete effectively.

Here's NY Times piece by Jim Yardley on growing clout of Indian business lobby in New Delhi's policies:

The foray into Pakistan is further proof of the increasingly important role of India’s private sector in foreign policy. India’s leaders, eager for a bigger footprint in global affairs, now aspire to a permanent seat on an expanded United Nations Security Council. But the Indian Foreign Service, though consisting of top-notch officers, is too understaffed to provide a comprehensive global presence.

To compensate, the government often relies on the private sector to serve as an intermediary abroad. India’s two leading business groups — C.I.I. (the Confederation of Indian Industry) and Ficci (the Federation of Indian Chambers of Commerce and Industry) — now have offices around the world and sponsor informal diplomatic dialogues between India and countries like Japan, China, Singapore and the United States.

British Deputy High Commissioner, Alison Blake says relations between her country and Pakistan have always been cordial and continued to grow.

In an exclusive interview with Pakistan Observer she said trade between the two countries will double in three years. More than 100 British companies are operating in Pakistan and more intend to join them.

She said “the hall-mark of our foreign policy for Pakistan is ‘people to people’ approach. “This is the way to deepen relations between the two nations,” she observed.

Blake said: “The UK and Pakistan are deeply connected. Yet not many people know about the connections in terms of people, trade, culture, education and development that form our unbreakable partnership”.

She spoke of key facts regarding Pakistan-UK relations: The UK is home to the largest overseas Pakistani community, approximately 1.2 million today. There are 30,000 Pakistanis studying in the UK at any one time. British Pakistanis are heavily involved in all levels of British politics. From MPs in the House of Commons to Peers in the House of Lords including Baron Nazir Ahmed and Baroness Warsi.

On bilateral trade she said: UK & Pakistan have an ambitious target to boost bilateral trade in goods and services from the 2010 level of £2.0 billion to at least £2.5 billion by 2015. The UK is the top destination in Europe for exports from Pakistan. Pakistan’s exports to the UK rose by 17% from Jan to Oct 2011, with particularly strong growth in textiles. UK is the largest European investor in Pakistan. UK is Pakistan’s strongest advocate for market access to the EU. UK is the 3rd largest overseas investor in Pakistan with 13.46% market share (FY 2009-10). Over 100 British Companies operate in Pakistan with major interests in the Pharmaceutical, Financial Services, Energy and Retail sectors. On education, the British Deputy High Commissioner said: There are 30,000 Pakistanis studying in the UK at any one time. There are more people studying for O and A levels in Pakistan – some 170,000 of them - more than anywhere else outside of the UK. Pakistan is British Council’s largest overseas market for exams. UKaid will spend £650 million on education in Pakistan over the next 4 years. The UKaid funds will help to get more than four million children into school. UKaid will recruit and train an additional 90,000 teachers in Pakistan. UKaid will supply more than six million textbooks sets. UKaid will construct or rehabilitate more than 43,000 classrooms in Pakistan. Alison Blake said that the United Kingdom is home to the largest overseas Pakistani community. The population of British Pakistanis has grown from about 10,000 in 1951 to approximately 1.2 million today. She said: British Pakistanis are heavily involved in all levels of British politics. From MPs in the House of Commons including Sadiq Khan (MP for Tooting) Khalid Mahmood (MP for Birmingham Perry Barr) and Mohammad Sarwar (MP for Glasgow Central) to Peers in the House of Lords including Baron Nazir Ahmed and Baroness Warsi. Baroness Warsi is also a current Cabinet member”.

Here are some excerpts of a News interview with Pak industrialist Mian Mansha:

Q. What is your view on trade with India?

Mansha: I have always been a strong proponent of trade with India, which offers a bigger opportunity than China. We have many synergies, which were not exploited due to trade barriers between the two countries. We are keenly awaiting gradual removal of trade barriers between India and Pakistan.

Q: Why so many exhibitors are going to Lifestyle Pakistan Expo in India?

Mansha: Indians exhibited their products at Expo Center Lahore couple of months back. We are going to India to reciprocate and showcase our products in India. We produce one of the finest cotton fabrics for women, which are extremely popular in India. Besides some of our best designers are also exhibiting their cotton-lawn suits.

Q: India has granted MFN status to Pakistan long time back; how do you expect to penetrate Indian market now when you have failed in the past?

Mansha: I am optimistic that after liberalisation of trade from our side India would further open up. The mind set in both countries was changing. We were exporting a small quantity of our brand of lawn to our franchise in India but we were not allowed to establish our outlets, but then it was the same for the Indian businessmen in Pakistan.

Both the sides need to remove the non-tariff barriers to promote free trade. Indian Punjab has not kept pace with the growth in rest of India and they see open trade with Pakistan as the best way to achieve higher growth.

Apart from textiles, we want to open branches of our banks in India, as our banking system has an edge over Indian banks in services and efficiency. Similarly Indians would like to establish offices in Pakistan where they have an edge.

Q: How can free trade between the two countries flourish with several unresolved territorial disputes?

Mansha: I am against making trade hostage to political issues. There are many disputes between the members of European Union, but their leaders do not compromise the welfare of their people by stalling trade till resolution of those disputes.

We should go ahead with a gas pipeline project from Central Asia that carries gas for India. Pakistan would benefit through the service charges it would get for allowing gas passing through its region.

Q: Are you still facing non-tariff barriers in cement exports and how do you view last year’s cotton export ban by India?

Mansha: Cement export to India is allowed by train only and you cannot export large quantities through train as the frequency of trains running between India and Pakistan is very low.

As far as the ban on export of cotton by India last year on confirmed orders was concerned it was not Pakistan specific. This measure though anti trade was applicable on all countries. .

With their sizable nuclear arsenals and tensions over territory, water and terrorism, India and Pakistan pose staggering risks to South Asia. But they also offer outsize economic potential for their citizens, the region and the world. Leaders in both nations seeking peace, stability and a prosperous future should seize on free trade as the best way to further these goals. The time has come for an India-Pakistan free trade agreement.

Free trade would substantially increase trade and investment flows, incomes and employment, and it would give the citizens of both countries a far greater stake in the other's success. Economists of varying backgrounds agree that free trade is a positive-sum economic activity for all involved. In the seven years following Nafta, trade among the United States, Canada and Mexico tripled and real wages rose in each country.

The International Monetary Fund reports that direct trade between Pakistan and India was a pitifully small $2.7 billion in 2010, just two-thirds of India's trade with far smaller Sri Lanka. Remarkably, Pakistan's exports to Bangladesh are larger than those to India, though Bangladesh's economy is only 6% the size of India's. South Asia doesn't have enough trade.

The tool economists use to analyze bilateral trade, called the "gravity model," suggests trade should be proportional to the states' GDP and inversely proportional to the distance between them (a proxy for transportation costs). India's GDP of over $4 trillion is roughly nine times that of Pakistan's.

Estimates based on gravity models by Amitra Batra of Nehru University and Mohsin Khan of the Peterson Institute suggest that Pakistan-India trade could be at least 20 times larger with a bilateral free trade agreement than it is today. That's a staggering expansion of over $50 billion that would raise real wages in both countries.-----------The obstacles to such an agreement range from cross-border security concerns to old-fashioned protectionism. The perceived economic vulnerability to free trade of some domestic firms, sectors and regions can be addressed with transition relief such as worker retraining and tariff phase-in periods.

Realistically, it will take several years to negotiate and implement a free trade agreement between India and Pakistan. Even with strong political leadership, negotiating Nafta took four years.

Still, Pakistan President Asif Ali Zardari and Indian Prime Minister Manmohan Singh spoke of the importance of trade in their brief meeting earlier this month in New Delhi. Both men appear to understand that trade liberalization is economically necessary and will diffuse tensions between these two nuclear nations. The next step is to initiate high-level discussions of a free trade agreement.

Here's a CNN blog post on US pushing economic integration in central and south Asia region:

The United States aims to promote stability in Central Asia by encouraging trade in the region, U.S. Secretary of State Hilary Clinton told CNN.

The American strategy focuses on bolstering north-south trade, linking India and Pakistan via Afghanistan to the former Soviet republics of Central Asia.

“If people are trading with each other, if they are investing in each other's countries, if they are engaged in commerce of all kinds, there develop relationships and, frankly, stakes in peace and security that are desperately needed,” Clinton told CNN’s Jill Dougherty.

“Security yes, we have to work on that, but what is really promising is the economic integration of the entire region,” she added.

But for many countries in the region, economic integration is seen as secondary to security. Instead of borders opening to trade, many are closing. But Clinton cited increased trade between India and Pakistan and across the Pakistan-Afghanistan border as examples of progress.

She added: “There is an important idea of a pipeline that would carry gas from Turkmenistan through Afghanistan and Pakistan into India; all four countries are in support.

“There are roads and bridges being planned that come from Kazakhstan through Uzbekistan into Afghanistan that go through Turkmenistan to the sea. There’s just a lot of ideas.”

And she said trade could help combat extremism in the region. “Some countries would like to build a 20-foot wall because they worry about extremists from other places,” said Clinton. “That’s just not realistic in the 21st century. It’s far better to develop your economy to trade with your neighbours to give your young people jobs. That’s one of the best arguments against extremism.”

Clinton gave Uzbekistan as an example of U.S. investment, where an American automobile manufacturing plant is producing cars for export in the region.

“Each country has unique assets that can be capitalized on but no country alone can maximize their economic potential without opening their borders to more trade and investment,” she said. “So while we work bi-laterally with a lot of these countries to help them, we also continue to preach the idea of economic integration.”

She added: “We do have to put security at the forefront, and the United States has helped every one of these countries with security. But what is security for? It is to enable people to have a better life and one of those is by raising the stand of living and business, investment, and trade can do that.”

Pakistan and India bilateral trade is expected to reach $10 billion during the next three years, a top official said.

The Most Favoured Nation status to India and opening of bank branches by early next year will pave the way for direct trade between the neighbours and reduce the cost of import through third country.

"Bilateral trade may reach $6 billion mark within a year or two as the two nations act fast on easing visa rules, removing non-tariff barriers and reducing the negative list," Tariq Puri, chief executive of Trade Development Authority of Pakistan, told Pakistan and India official bilateral trade stood firm around $2.7 billion and heavily tilted in New Delhi's favour. The MFN status to India by year-end may prove the 'game-changer' that will drastically reduce illicit trade through third countries.

"The exchange of goods through third-country will drastically drop and cut the Pakistan import bill by 20 to 30 per cent because of reduction in import costs," Puri said.

Pakistan's federal cabinet approved a negative list of 1,209 for India, which will be phased out in three installments by December 31 this year, after the grant of MFN status to India. The MFN status will mean India can export 6,800 items to Pakistan, up from around 2,000 at present. "We started the process to normalise the trade with India last year in April. Both the countries have adopted a well-structured and calibrated approach and made steady progress," he said adding that next secretary-level talks are due to held in Pakistan this month.

"Negotiations to set up bank branches in each other country are underway and we hope further progress on easing visa rules for Pakistani businessmen and removing non-tariff barriers on Pak goods import in India in next meeting."

"It's a step-by-step approach that will benefit both the countries," he added.

He said two countries in April inaugurated a trading post at Attari-Wagah crossing that will help speed-up transportation of goods to either side of the border. It is expected that number of daily trucks crossing the border will sharply go up to four times to 600 from present level of 150.

He said the MFN status to India, setting up of bank branches and easing visa rules will help boost bilateral trade and pave the way for frequent exchange of trade delegations and arrange exhibitions in the two countries.

Pakistan successfully concluded a lifestyle exhibition in New Delhi last month while India attended the similar expo in November. "The exhibition will go a long way in opening of trade opportunities for Pakistan business," he said.

Puri dispelled the impression that Pakistani products will not be able to compete in Indian market. "Pakistani products are competitive and known for its quality. We are competing in international markets in US, Europe and Middle East and can compete the Indian products as well."

"Pakistan achieved $25 billion exports target last year due to enabling environment. This year, we are sustaining the same level despite economic problems in Europe and some other international markets," he said.

Puri, at the investment meeting, also presented a snapshot of Pakistan trade with major regions like NAFTA, Saarc, Asean, EU where tremendous opportunities exists for Pakistani businessmen.

Pakistan has spent 43.5 percent (or $3.815 billion) more dollars during the July-April 2011-12 period on import of petroleum products as during the ten-month period the country imported petroleum products worth $12.58 billion against $8.76 billion in corresponding period last year, according to official data.

During the period petroleum imports were one-third of the country’s total imports of $37.04 billion. Petroleum group was followed by agricultural and other chemical group imports of $5.98 billion showing an increase of 16.77 percent over $5.12 billion last year.

Machinery imports also secured a sizable share in country’s total imports during the period under review and it stood at $4.567 billion against $4.41 billion last year, showing a rise of 3.5 percent.

Pakistan Bureau of Statistics (PBS) bulletin indicates that under the petroleum group, petroleum products import stood at $8.35 billion against $4.92 billion last year, showing an increase of 69.8 percent. Besides, crude petroleum import also showed an increase of 49.9 percent to $4.23 billion during these ten months from $3.85 billion in same period last year.

Under the agricultural and other chemical group, manufactured fertilizers import up by 116.5 percent to $1.082 billion, plastic materials by 1.88 percent to $1.28 billion, while imports of insecticides were down by 9.76 percent to $110.39 million and medicinal products reduced by 3.1 percent to $548.66 million over July-April 2010-11.

In the machinery group, textile machinery import declined by 15.11 percent to $339 million against $399.4 million same period last year. Telecom sector import was up by 22.85 percent to $1.05 billion; power generation machinery import increased by 1.3 percent to $877 million; electrical machinery and apparatus import increased by 0.07 percent to $675.3 million; agriculture machinery by 32.7 percent to $103 million; office machinery by 22.6 percent to $239.8 million; construction and mining machinery by 12.6 percent to $111 million over same period last year. During the period, Pakistan spent $568.75 million which was 29 percent more than last year imports of $441.05 million.

In the transport group, imports reduced by 7.26 percent to $1.67 billion from $1.8 billion last year. However, under the completely built units (CBU) during July-April 2011-12 imports of buses, trucks and other heavy vehicles imports increased by 91.3 percent to $122 million and motor cars 161 percent to $285.4 million.

While, under the completely knocked down/semi knocked down category, imports of buses, trucks and other heavy vehicles imports up by 27.1 percent to $120.47 million, motorcycles 27.1 percent to $74.92 million, however, motor cars imports down by 1.14 percent to $389.78 million over same period last year.

The food import declined by 1.73 percent to $4.23 billion from $4.31 billion in July-April 2010-11. In this group, on palm oil import economy spent $1.89 billion which is 18 more than last year. Tea imports up by 4.76 percent to $301.9 million, while pulses import down by 7 percent to $320.27 million and spices imports down by 5.16 percent to $86.57 million over same period of last year.

In textile group, total import was of $1.98 billion against $2.42 billion depicting 18.26 percent decline over corresponding period of last year.

Under this head, raw cotton imports down by 56.68 percent to $369.4 million, synthetic and artificial silk yarn by 6.36 percent to $434.6 million, while synthetic and artificial silk yarn has up by 13.3 percent to $503.87 million and worn clothing import up by 16 percent to 122.48 million over last year...

Here's David Brooks in NY Times on Uncle Sam's role in promoting business & industry:

From the dawn of the republic, the federal government has played a vital role in American economic life. Government promoted industrial development in the 18th century, transportation in the 19th, communications in the 20th and biotechnology today.

But the federal role has historically been sharply limited. The man who initiated that role, Alexander Hamilton, was a nationalist. His primary goal was to enhance national power and eminence, not to make individuals rich or equal.

This version of economic nationalism meant that he and the people who followed in his path — the Whigs, the early Republicans and the early progressives — focused on long-term structural development, not on providing jobs right now. They had their sights on the horizon, building the infrastructure, education and research facilities required for future greatness. This nationalism also led generations of leaders to assume that there is a rough harmony of interests between capital and labor. People in this tradition reject efforts to divide the country between haves and have-nots.

Finally, this nationalism meant that policy emphasized dynamism, and opportunity more than security, equality and comfort. While European governments in the 19th and early 20th centuries focused on protecting producers and workers, the U.S. government focused more on innovation and education.

Because of these priorities, and these restrictions on the federal role, the government could be energetic without ever becoming gigantic. Through the 19th century, the federal government consumed about 4 percent of the national gross domestic product in peacetime. Even through the New Deal, it consumed less than 10 percent.

Meanwhile, America prospered.

But this Hamiltonian approach has been largely abandoned. The abandonment came in three phases. First, the progressive era. The progressives were right to increase regulations to protect workers and consumers. But the late progressives had excessive faith in the power of government planners to rationalize national life. This was antithetical to the Hamiltonian tradition, which was much more skeptical about how much we can know and much more respectful toward the complexity of the world.

Second, the New Deal. Franklin Roosevelt was right to energetically respond to the Depression. But the New Deal’s dictum — that people don’t eat in the long run; they eat every day — was eventually corrosive. Politicians since have paid less attention to long-term structures and more to how many jobs they “create” in a specific month. Americans have been corrupted by the allure of debt, sacrificing future development for the sake of present spending and tax cuts.

Third, the Great Society. Lyndon Johnson was right to use government to do more to protect Americans from the vicissitudes of capitalism. But he made a series of open-ended promises, especially on health care. He tried to bind voters to the Democratic Party with a web of middle-class subsidies.------------

We’re not going back to the 19th-century governing philosophy of Hamilton, Clay and Lincoln. But that tradition offers guidance. The question is not whether government is inherently good or evil, but what government does.

Does government encourage long-term innovation or leave behind long-term debt for short-term expenditure? Does government nurture an enterprising citizenry, or a secure but less energetic one?

If the U.S. doesn’t modernize its governing institutions, the nation will stagnate. The ghost of Hamilton will be displeased.

A: There’s nothing wrong about China going around the world making resource deals to support its growing population. What it’s doing makes a lot of sense. Yes, my concern is that other countries will not catch on until it is too late. In a zero-sum world, what will happen if China wins the race for resources? Other countries seem to be asleep while China is making a concerted effort. Some 24 ongoing wars and violent conflicts have their origins in commodities, and this trend is poised to continue. China is befriending what I call “the Axis of the Unloved”—countries and regions such as Africa, Brazil, Colombia, Argentina and parts of Eastern Europe that have been basically ignored by the Western economies. China is the leading trading partner and foreign investor in many of these countries—a very different approach to the West’s largely aid-based model.

Q: The Chinese economic edge in this is that its state capitalism offers advantages that the Western laissez-faire model does not.

A: Favoured Chinese companies have a zero or near-zero cost of capital. State-owned banks provide highly concessional credit lines, in the form of government grants or low-interest loans. Favoured companies also benefit from tax breaks and the preferential allocation of key contracts. Like the US$12-billion credit line extended to Wuhan Iron and Steel, a major steel producer, by the state-owned China Development Bank, for ﬁnancing “overseas resource base construction.” And of course it helps to have a war chest of over US$3 trillion, while Western economies are struggling with cash constraints.

Q: The Chinese political edge is that it’s famously untroubled by governance issues in the countries it deals with.

A: Well frankly, in practice there is little to distinguish between the commodity counterparts of Western nations and those of China. U.S. and European countries are just as happy as China to strike deals with countries with less than pristine reputations—whether it’s Saudi Arabia, Venezuela or Russia. Two wrongs don’t make a right, but in this narrow sense, it’s unfair to constantly point fingers at China.

Q: So you think that criticism of China on both scores—cheating, so to speak, economically and being too comfortable with dictators politically—is often unfair and wrong?

A: Cheating is one thing, meddling in the markets is a whole other thing. Virtually all governments meddle in the commodities markets. Western governments are particularly egregious in this respect. The United States paid US$6 billion in commodity subsidies in 2010. OECD countries spend a total of US$226 billion on agricultural subsidies yearly. And in the EU, the Common Agricultural Policy sees some 40 billion euros spent on direct farm subsidies. So if meddling in the market is “cheating,” China has a lot of company. And the West has never had much of a problem dealing with despots and dictators if there is a benefit to be gained.-------------A: I think the reasons are quite clear. China pursues strictly business, symbiotic relationships, trading access to commodities for infrastructure, employment and other economic benefits. Take employment. The construction of the Imboulou Dam in [the Republic of the] Congo in 2010 employed 2,000 locals (compared to 400 Chinese). Survey results indicate that Africans much prefer to deal with the Chinese than with Westerners. In Ivory Coast, Mali, and Kenya, more than 90 per cent of respondents see China’s economic growth as “a good thing.” In Tanzania, 78 per cent agree, but only 36 per cent feel the same way about American influence. The difference is stark. Across the developing world, people want jobs, infrastructure and investment and the Chinese engagement does exactly that. ....

IN A world economy as troubled as today’s, news that India’s growth rate has fallen to 5.3% may not seem important. But the rate is the lowest in seven years, and the sputtering of India’s economic miracle carries social costs that could surpass the pain in the euro zone. The near double-digit pace of growth that India enjoyed in 2004-08, if sustained, promised to lift hundreds of millions of Indians out of poverty—and quickly. Jobs would be created for all the young people who will reach working age in the coming decades, one of the biggest, and potentially scariest, demographic bulges the world has seen.

But now, after a slump in the currency, a drying up of private investment and those GDP figures, the miracle feels like a mirage. Whether India can return to a path of high growth depends on its politicians—and, in the end, its voters. The omens, frankly, are not good.-----------Is it time for a change at the top? Mr Singh has plainly run out of steam, but there are no appealing candidates to replace him. Mrs Gandhi’s son, Rahul, has been a disappointment. What about a change of government? The opposition BJP is split and has been wildly inconsistent about reform. Its best administrator, Narendra Modi, chief minister of Gujarat, is divisive and authoritarian. If it formed a government tomorrow, the BJP would also have to rely on fickle smaller parties.

Some reformers pray for a financial crisis that will shake the politicians from their stupor, as happened in 1991, allowing Mr Singh to sneak through his changes. Though India’s banks face bad debts, its cloistered financial system, high foreign-exchange reserves and capable central bank mean it is not about to keel over. A short, sharp shock would indeed be useful, but a full-blown crisis should not be wished for, because of the harm that it would do to the poor.

Instead the dreary conclusion is that India’s feeble politics are now ushering in several years of feebler economic growth. Indeed, the politicians’ most complacent belief is that voters will just put up with lower growth—because they supposedly care only about state handouts, the next meal, cricket and religion. But as Indians discover that slower growth means fewer jobs and more poverty, they will become angry. Perhaps that might be no bad thing, if it makes them vote for change.

The European Parliament’s plan of doing more “for poorer countries” has opened trade gates for three new countries including Pakistan.

The new rules will enable Pakistan, Philippines and Ukraine to apply for zero duty access on their exports to the EU under the “GSP+” incentive scheme, according to a Parliament statement.

“The new EU trade scheme is more predictable and more generous to countries that deserve it,” said British Conservative MEP and Legal Affairs spokesperson, Sajjad Karim. Pakistan will be allowed to apply for zero duty access if they agree to abide by the 27 international conventions in the field of human rights.

The new rules will reduce the number of countries that enjoy preferential access to EU markets from 176 to around 75. It will also reduce the total value of imports that qualify for EU preferences from 60 billion euros in 2009 to about 37.7 billion euros in 2014.

The updated generalised system of preferences (GSP), the Parliament informed, removes tariff preferences, such as reduced or zero duties, for EU imports from countries where per capita income has exceeded US 4,000 for four years. This rule ousted Russia, Brazil and Saudi Arabia from the beneficiaries list and will now have compete on an equal footing with the EU in world markets. Latin American countries Argentina, Brazil and Uruguay remained out of the benefitting list.

The GSP plus scheme will contribute to the promotion of human rights, democracy and freedom of speech in the developing world, added Karim who is also Chairman of the European Parliament Friends of Pakistan Group.

“The European Parliament Friends of Pakistan group has been campaigning to increase the threshold of the GSP+ scheme to allow Pakistan to enjoy more trade with the EU.”

He also dismissed the few MEPs who called for Pakistan not to be included in the trade scheme in a European Parliament debate on Monday.

“The clear long-term strategy is for the EU and Pakistan to cooperate on a wide range of issues including trade, security and policy. The EU-Pakistan Five Year Engagement Plan and the recent successful launch of the first Strategic Dialogue in Islamabad this month with Baroness Ashton is clear evidence of that,” he added.

...While the European Union is still by far the largest destination for Pakistani exports, South Asia – which includes Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, and Sri Lanka – is now the second-most important market for Pakistani products. The EU absorbed 24.6% of Pakistani exports, compared to 28.4% in 2003. By contrast, South Asia used to account for just 6.3% of Pakistani exports in 2003 and is now the destination for 16.7% of Pakistan’s export earnings.

This growth appears to be led by Afghanistan, which is now Pakistan’s second-largest single country market, behind the US. Pakistan exported $3.8 billion worth of goods to the US in 2011 and about $2.7 billion to Afghanistan. The US and Canadian share of Pakistani exports has dropped from 24.7% in 2003 to 16% last year.

Perhaps surprising, however, is the growing importance of East Asia – particularly China – as an export destination for Pakistan. People are familiar with the fact that Pakistan’s imports from China have been rising substantially. Yet most seem unaware that China is also one of the two fastest growing export destinations for Pakistan (the other being Afghanistan). Pakistani exports to China have been growing at 26.3% per year for the last eight years, making China the number four destination for Pakistani exports, up from number 13 eight years ago.

Pakistan’s trade with China is, nonetheless, highly unequal and somewhat colonialist in nature. More than three-quarters of Pakistan’s exports to China are raw materials, with cotton accounting for 70% of goods leaving Pakistan for Chinese ports. (China accounts for more than half of all raw cotton exports from Pakistan.) Meanwhile, China’s exports to Pakistan – which totalled $6.5 billion last year – are mostly electronic equipment and industrial machinery.

An even more surprising fact: the importance of the Gulf Arab states to Pakistan’s exporters appears to be declining rapidly. The Gulf Cooperation Council (GCC) – comprising Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Bahrain and Oman – now accounts for 11.1% of Pakistan’s exports compared to 15% about eight years ago. Much of this shift is attributed to the fact that Pakistan now exports many more goods directly to India, compared to only a few years ago, when the UAE served as a conduit between the two countries.

And despite not granted preferential trade status to Pakistan, the EU has maintained its position as the largest destination for Pakistani exports. Within Europe, the biggest market for Pakistani exporters is Germany, followed by the United Kingdom and Italy.

While Pakistan’s trade balance has been consistently deteriorating over the past few years, it has not done so uniformly. The bulk of the increase Pakistan’s trade deficit can be attributed to higher oil prices, which have taken Pakistani imports from the Gulf to $16.1 billion in 2011, from just $3.8 billion in 2003.

The data on Pakistan’s trade patterns reflects an important point: Pakistan is no different from the rest of the world when it comes to the fact that it relies increasingly on exports to Asia, rather than the older, developed markets of Europe and the US.....

You say: ".....Pakistan, too, was ruled by a military dictator General Ayub Khan in a period labeled by Pakistani economist Dr. Ishrat Husain as "the Golden Sixties". General Ayub Khan pushed central planning with a state-driven national industrial policy. In fact, South Korea sought to emulate Pakistan's development strategy and copied Pakistan's second "Five-Year Plan"........

The reason why Pakistan did not manage to match Korea's *long-term* performance is because Pakistan did not have a plan to boost gross domestic savings. On the other hand, Korea's government correctly used the fast low-ICOR growth of the sixties to actively promote the growth of savings-rates. Korea then channeled the rapidly rising savings into productive heavy industrial investment in the seventies & eighties to generate fast high-ICOR growth. This is how Korea became an a moderately industrialized country by the nineties and has now become a "fully" industrialized one.

The simple fact that we have still not been able to move beyond low-ICOR light industry-- because we just do not have the savings to do so-- is precisely why Pakistan is still a Third World country.

Here is the data from the World Bank. Just look at Korea's performance from 1960-1990 (from 3% savings to 36% savings in 30 years) savings and compare it to ours (going nowhere in particular).

With regard to "By 1969, Pakistan’s manufactured exports were higher than the exports of Thailand, Malaysia and Indonesia combined", here is the PROOF that some of the code-coolies were asking for in the comments section-

Riaz Haq: "Most of India's economic boom has been driven by foreign inflows, and their recent drop has cooled Indian economy."

---------

Dr. Haq,

Why? Why do you keep doing this? Again and again? Why?

Have we not been through this issue many times before?

A) Relative Importance of Various Sources of Funding for INDIA:http://alturl.com/zn2i6

B) Relative Importance of Various Sources of Funding for OUR COUNTRY:http://alturl.com/wxqdv

We must face the facts. We must accept the truth. Our denial must now end. Only then can we begin to heal, change and progress.

Thank you.

*****OLD POST FOLLOWS*****

Dr. Haq,

I agree with you that our country desperately needs more investment. So I thought that we should go over the various potential sources of funds for the sorely-needed investments and see how important each has been to our economy in the past.

The same graphs for India are shown below. The graphs clearly show that India's economy is fundamentally different from ours in a structural sense. One key difference immediately visible is that their economy has *always* been driven principally by Internal Savings. All the others (FDI, FPI, Remittances & Aid) are actually relatively less important to their economy.

Specifically, as shown in the graphs, during the Cold war (pre-1992 period) Internal Savings accounted for 91% (on average) of their funding sources for investment, with remittances at 5% and Aid contributing 4%, with negligible FDI & FPI (Soviet-Model Closed Economy).

After the post-Cold-War reforms in 1992, their economy is *still* principally driven by internal savings (now on average 84%), with Remittances now contributing 9%, FDI & FPI together contributing 5.5% and Aid contributing 1.5% (all on average).

HWJ: "One key difference immediately visible is that their economy has *always* been driven principally by Internal Savings. All the others (FDI, FPI, Remittances & Aid) are actually relatively less important to their economy."

High internal savings didn't save India from 1991 BOP crisis.

India's rupee-denominated savings didn't amount to a hill of beans....they couldn't be used to buy even an ounce of oil on the world market.

Unlike China and other BRICs, India runs huge trade deficits and external inflows have been crucial to India's economic growth in the last two decades.

India's rupee-denominated savings didn't amount to a hill of beans....they couldn't be used to buy even an ounce of oil on the world market.

Unlike China and other BRICs, India runs huge trade deficits and external inflows have been crucial to India's economic growth in the last two decades."

--------

The discussion above was not really about BOP crises.

The discussion was about whether or not we can build our industrial base with foreign money.

And the answer is NO. No chance whatsoever. Zilch.

The ONLY way a country can build its industrial base is with HIGH domestic savings & high domestic investment. There is not a single country in the world which industrialized using foreign savings & investments. None. Zero. There are no "shortcuts" to the goal of industrialization and development.

You might not like to hear this, but it is the truth. You can pout, stamp your feet and throw a tantrum. But, at the end of it all, the truth will still be there completely unchanged. It is almost Quranic.

In any case, since you have raised, for some reason, the BOP issue again, let us look at the case of South Korea (a demonstrated success story):

1) Like India does today, SK ran constant current account deficits from 1960 to 1997 when it was rapidly industrializing.

2) SK has a BOP crisis in 1997 that was identical to India's in 1991.

3) Contrary to popular belief, which you seem to share, these crises were NOT caused by the running of current account deficits per se, nor were they caused by flight of "hot-money". Instead, they were caused by the WAY in which these deficits were financed using short-term debt based on unhedged or inverted balance sheets.

4) The 1991 Indian crisis & the 1997 South Korean crisis were both caused by the fact that short-term external-debt exceeded Forex reserves, therby putting them in a squeeze when their maturing ECBs were not rolled-over. They were NOT caused by capital flight as our 1998, 2001 & 2008 BOP crises were. South-Korea's 1997 & India's 1991 problems were not structural; they were caused by the use of non-optimal financing options.

5) The lesson has been learnt and today's short-term external-debt to Forex-reserves ratios are held <20% by most countries.

6) Note that our repeated BOP crisis since the late nineties (1998, 2001, 2008) were NOT caused by non-optimal financing using unhedged balance sheets. They were fundamentally structural in nature as they were caused by massive capital flight from a capital-poor economy.

These concepts are really basic and not at all hard to understand. If you just take the time to study the subject, you will be able to appreciate the nuances of these discussions quite readily.

TAKE THIS TEST: China runs a massive current account surplus. Do you believe that this is a sign of China's strength?

If you answered YES, you would be in the company of the majority of people. However, you, along with the majority of people, would be WRONG.

Macroeconomically speaking, China's massive current account surplus while it is still a developing country is a sign of its WEAKNESS. And you will see this weakness manifest itself in the next 8-10 years when China's structural problems become public knowledge.

China's massive current account surpluses are a terrible symptom of a fundamental underlying flaw in the structure of its economy. China is heade for very serious trouble.

Here is an article on India's current (2012) danger of BOP crisis. It says something similar to what you were saying:

http://alturl.com/ajt7k

Most interesting thing about this article is that it seems to provide a CALCULATOR for the BOP analysis:

http://alturl.com/xsrrp

I thought you might like to play with it. Might be fun.

I really wish someone would come up with an analysis and a calculator for our BOP situation. But I suppose since our economy is much smaller, these global media people will always be ignoring our situation.

Let me know if you find any interesting scenarios when you play with their India-BOP calculator.

A major breakthrough came in the area of modernization of Railways. Pakistan, under the agreement, will seek high speed railways, communication systems, signaling, rail stock, modernization of operation and management, development of logistics parks and freight terminals, exchange of construction and maintenance technologies for infrastructure including tracks, bridges, overhead electrification and power supply systems.

The agreement was signed by Muhammad Arif Azim Secretary Railways and Minister of Railways of South Korea Kwon Do-youp. President Zardari in his meeting with President KORAIL Chung Chang-Young said Pakistan desired modern and efficient railways to help meet its growing industrial, agricultural and freight needs.

He said the current fleet of Pakistan Railways was unable to meet the needs of a growing nation and there was an urgent need to upgrade it.

The President who had a number of meetings with the heads of top Korean business houses said Pakistan was a heaven for foreign investors as the country's large consumer population promised good profits and lucrative business.

He said a large number of Korean companies were already operating in Pakistan and doing good business.

He said other companies can invest in many new areas while the existing ones can expand and diversify their operations. President KORAIL assured President Zardari that his company was willing to share its experiences and expertise with Pakistan Railways and help it develop on modern lines.

The President later witnessed the inking of a MoU under which Pakistan will be able to acquire used diesel locomotives and work for modernization, maintenance, operation and training of existing ones.

President Zardari during his meeting with the President and Chief Executive Officer of Samsung C&T said Pakistan needs to augment its energy resources to meet the growing demand of its industrial and domestic requirements...

India has one of the most restrictive trade regimes in the world, according to the World Trade Organisation (WTO).

Economists and WTO experts, quoting an annual report of the WTO, stated that the Indian government around seven years back initiated 191 safeguard actions compared to just 171 by China, a much larger economy. In fact, this was even higher than the number of actions initiated by the EU, also a much larger economic bloc.

And a new study conducted by the United States Agency for International Development (USAID) has revealed that India stands at the top in South Asian countries on the basis of trade restrictions imposed on neighboring countries, according to criteria set by the World Bank.

Experts pointed out that India is accused of using both tariff and non-tariff barriers to discourage imports from neighboring countries. It is no surprise, then, that trade between India and Pakistan is so skewed right now. The volume of trade is growing, but not in a way that seems to be of any real benefit to Pakistan. In 2006-07, Pakistan exported goods worth $342.9 million to India, against imports of $1.24 billion. In 2010-11, Pakistan’s exports to India had dropped to $264.3 million, while imports from India had surged to $1.74 billion.

Giving an example, sources said that if the MFN status is granted to India without completion of infrastructure at the Wagha border, the prices of goods coming from India, will double due to the choking of trucks and the purpose of cheaper goods supply to people will not be served.

Experts maintained that a level playing field must be created for Pakistan’s textile products relative to Indian products through implementing a uniform tax regime before the MFN status is granted to India.

The negative list lays restrictions on imports of 1,209 items from India, which includes 78 textile and apparel items. Pakistan’s farmers fear that there is not a single agriculture item on the negative list or the sensitive list of Pakistani imports from India, except Tobacco and its different forms.

Insiders claim that phasing out of the negative list or MFN status to India will not have any negative impact on Pakistani agriculture as only one item, i.e. Tobacco will suffer from the grant of MFN status to India.

Pakistan will have to be mindful of the pitfalls of allowing completely unfettered and unhindered imports from a much larger and much more developed economy. The USAID report suggests that Pakistan should actually enhance the sensitive list to protect the local industry and agriculture sector following granting MFN status to India.

This year will see some major shifts, with some local industries having to suck it up and see the end of their life inside the bubble of protectionism. This will bring benefits for the local consumer, who will have access to more choices and cheaper products.

But it will also bring in threats to other industries which do not have the same benefits, or are as developed as their counterparts in India.

For a long time the governments were always lacking political will to grant Most Favoured Nation (MFN) status to India but industrialists, traders and civil society activists continued to advocate increasing trade with India, saying this would be a great way to forge better relations and solidify peace overtures between the two nations.

Currently the trade volume between India and Pakistan is about $2.5 billion and it is expected that this can be enhanced to $8 billion in the next two years.

The Ministry of Commerce will conduct trade policy research in collaboration with the European Union (EU) for increasing exports and domestic commerce.A statement issued by the ministry on Friday said that the EU will assist Pakistan in policy research on the initiatives contained in the recently announced three-year Strategic Trade Policy Framework (STPF) 2013-15.In this regard, a meeting was held of the Public Private Dialogue Steering Committee, established by the Ministry of Commerce to hold public-private dialogue on specific trade policy issues and commission policy research studies.The meeting also reviewed policy research studies, conducted during 2012, on enhancing export potential in livestock and dairy sectors, enhancing exports to Europe, enhancing competitiveness and export potential for trade with India.

KARACHI - The country’s trade balance slid by a significant 19.7% MoM to a comfortable $ 1.743 billion in Jun-13, said the analysts at InvestCap Research citing data recently issued by the Pakistan Bureau of Statistics. Whereas the exports on a monthly basis inched up slightly by 1% MoM to $2.197 billion in Jun-13, the imports stepped down by 9.4% MoM to USD3.940 billion. “Such a trend can be explained by the absence of fertilizer imports in Jun-13, whereas the same stood at 97k tons in May-13 (USD53.7mn), the contribution of Urea to Jun-13 figures was absent due to delay in supply which is now expected to be received by the end of July-13,” said InvestCap analyst Muniba Saeed. Further, she said, contributors to the declining imports are expected to be fall in palm oil imports (importers already having stocked up for Ramadan), decline in imports of textile machinery and falling imports of generators. On an annual basis, the imports remained essentially stagnant increasing by a meager 0.08% YoY, climbing to a level of $44.950 billion in FY13. “Such a trend was witnessed despite decline in imports of petroleum products, fertilizer and the food group; the three heads combined contributing roughly 60% to total imports for the year,” the analyst said. The same was, however, negated by increased imports of machinery and the textile group leading to the imports head remaining effectively the same as last year, she said. Exports on the other hand increased by 3.78% YoY adding an additional USD894mn to the head to reach USD24,518mn. Such expansion is expected to be led by increased exports from the food group where sugar is projected to be the major contributor in fuelling such growth. Exports from the other heads are however expected to have subsided during the same period where major contribution is anticipated from the textile and petroleum group. The trade balance for FY13 as a result posted a decline of 4% YoY, descending to an amount of USD 20,432mn.

Here's a book review of "How Asia Works" by Amb Maleeha Lodhi published in The News:

An important new book explains why some countries have become economic tigers in East Asia while others are relative failures or paper tigers. ‘How Asia Works’ by Joe Studwell is a bold and insightful work that is essential reading for anyone interested in understanding the ingredients for economic success in this continent.

It challenges much conventional wisdom in the development debate. Most significantly the book questions key tenets of the so-called Washington consensus, which prescribes free market ‘solutions’ for all economies regardless of their level of development. Studwell establishes that a nation’s development destiny is shaped most decisively by government action and policies. History, writes the author, shows that markets are created, shaped and re-shaped by political power.---------------At the very outset, Studwell identifies three critical interventions that successful east-Asian countries and China (after 1978) employed to achieve accelerated economic development. The first, “often ignored”, and now “off the political agenda” in developing countries, is land reform. This restructured agriculture into highly labour-intensive household farming. In the early phase of development, with the necessary institutional support, this helped to generate a surplus, create markets and unlock great social mobility.

The second intervention, as countries cannot sustain growth only on agriculture and must transition to the next phase, is to direct entrepreneurs and investment to industrial manufacturing. Manufacturing allows for trade and technology learning. And trade, says the author, is essential for rapid economic development. Studwell then demonstrates – while challenging the champions of free trade – how nurturing and protection, along with instituting “export discipline”, builds the capacity to compete globally. Manufacturing policy is a key determinant of success he says, as an infant industry strategy offers the quickest route to restructuring the economy towards more value-added activities.

Holding that development is quintessentially a political undertaking, the author sees the relationship between the state and private entrepreneurs as a critical variable. History, he writes, teaches that governments should not run everything themselves. But governments have to use their power and the right policy tools to make private entrepreneurs do what industrial development requires.

The third intervention necessary for accelerated development is in the financial sector, aimed at directing capital initially to intensive, small scale agriculture and to manufacturing rather than services. Studwell argues persuasively that it was the close alignment of finance with agriculture and industrial policy objectives that produced north-east Asia’s economic success.

Detailing the role of financial policy, he illustrates how premature bank deregulation exacted a high price in Thailand and Indonesia. China, on the other hand, and other north-east Asian countries resisted that, instead using financial management to serve development needs and an accelerated economic learning process.

Here are a few excerpts from a recent book "Street Smarts" by Hedge Fund Manager Jim Rogers:

"Many Asians say that the Asian Way is first to open your economy, to bring prosperity to your country, and then, only after that, to open up your political system. They say thar the reason the Russians failed is that did it the other way around. Russia opened up its political system in the absence of a sound economy, everybody bitched and complained, and chaos inevitably ensued. As an example of the Asian path to political openness, they point to South Korea and Taiwan, both of which were once vicious dictatorships supported by the United States. Japan was at one time a one-party state supported by the US military. Singapore achieved its current status under one-party, authoritarian rule. All these countries have since become more prosperous and more open.

Palto,in The Republic, says that the way societies evolve is by going from dictatorship to oligarchy to democracy to chaos and back to dictatorship. It has a certain logic, and Plato was a very smart guy. I do not know if the Asians ever read The Republic, but the Asian way seems to suggest that Plato knew whereof he spoke."

Not only is the Asian model different from that of the Soviets, it stands China in marked contrast to those thirty-year dictatorships previously mentioned. Chinese leaders have put a high premium upon changing the country's economy, presumably to seek prosperity for the 1.3 people who live there."------------"And yet,in 1947, when it achieved independence, India was one of the more successful countries in the world, a democratic country. But despite democracy, or maybe because of it, India has never lived up to its potential. China was a shambles as recently as 1980. India was far ahead of it. Bt since then China has left India, literally in the dust....As China rises, India continues to decline relatively. Its dent-to-GDP ratio is now 90 percent, making a strong growth rate virtually impossible."

That India is an economic mess is known all over the world. What is not yet public is that the malaise was because of the wrong decisions which president Pranab Mukherejee took when he was Union finance minister from January 2009 to mid-2012 and also when finance minister P Chidambaram was heading the ministry nearly till the end of 2008 and before.

Mukherjee lives in the luxuries of Rashtrapati Bhavan and Chidambaram shields himself behind tall promises he still makes to mend the economy. Both of them are accountable. They should tell why they took the steps which disturbed the rhythm of progress. Because of lack of transparency in the affairs of government, only a handful of people know about the blunders the two committed.

One of the decisions taken by Mukherjee was to impose the Rs 1200 crore tax with retrospective effect on a foreign mobile company. After having lost the case in the Supreme Court on September 8, 2010, the government promulgated an ordinance before amending the Finance Act 2012. The retrospective clause in the act has scared away foreign investment which India badly needs. A bagful of concessions has not brought the Walmart yet to the Indian soil. Foreign investors have withdrawn a large sum of money which they had invested. In a few weeks, as much $ 200 billion has reportedly gone out. The outflow has not stopped yet.

Prime minister Manmohan Singh did not anticipate the repercussions. In fact, after seeing the mess Chidambaram had created in 2008, the prime minister should have taken over the finance ministry himself because of his expertise in economic matters. Unfortunately, his own record as coal minister does not hold promise but the prime minister would have done better in finance. India should have been exporting coal, as it did, instead of importing it. Manmohan Singh may not be personally responsible for the corruption in the allotment of coal blocks. But the bungling runs into thousands of crores of rupees. The full story may not yet come out because some files are missing. The government has admitted this before the Supreme Court.

According to CBI as many as 157 files are missing. The missing files reportedly have some letters and noting on the allotment of coal blocks. The prime minister cannot absolve himself of the responsibility that he was not the custodian of the files. He was in charge of the coal portfolio. A top CBI official, who is probing into the scandal, has said that there may be a need to ‘examine’ the prime minister, who was in charge of the ministry from 2006 to 2009. Could the prime minister have connived at what the ministry had been doing because his personal integrity is beyond reproach?

That India is an economic mess is known all over the world. What is not yet public is that the malaise was because of the wrong decisions which president Pranab Mukherejee took when he was Union finance minister from January 2009 to mid-2012 and also when finance minister P Chidambaram was heading the ministry nearly till the end of 2008 and before.

Mukherjee lives in the luxuries of Rashtrapati Bhavan and Chidambaram shields himself behind tall promises he still makes to mend the economy. Both of them are accountable. They should tell why they took the steps which disturbed the rhythm of progress. Because of lack of transparency in the affairs of government, only a handful of people know about the blunders the two committed.

One of the decisions taken by Mukherjee was to impose the Rs 1200 crore tax with retrospective effect on a foreign mobile company. After having lost the case in the Supreme Court on September 8, 2010, the government promulgated an ordinance before amending the Finance Act 2012. The retrospective clause in the act has scared away foreign investment which India badly needs. A bagful of concessions has not brought the Walmart yet to the Indian soil. Foreign investors have withdrawn a large sum of money which they had invested. In a few weeks, as much $ 200 billion has reportedly gone out. The outflow has not stopped yet.

Prime minister Manmohan Singh did not anticipate the repercussions. In fact, after seeing the mess Chidambaram had created in 2008, the prime minister should have taken over the finance ministry himself because of his expertise in economic matters. Unfortunately, his own record as coal minister does not hold promise but the prime minister would have done better in finance. India should have been exporting coal, as it did, instead of importing it. Manmohan Singh may not be personally responsible for the corruption in the allotment of coal blocks. But the bungling runs into thousands of crores of rupees. The full story may not yet come out because some files are missing. The government has admitted this before the Supreme Court.

According to CBI as many as 157 files are missing. The missing files reportedly have some letters and noting on the allotment of coal blocks. The prime minister cannot absolve himself of the responsibility that he was not the custodian of the files. He was in charge of the coal portfolio. A top CBI official, who is probing into the scandal, has said that there may be a need to ‘examine’ the prime minister, who was in charge of the ministry from 2006 to 2009. Could the prime minister have connived at what the ministry had been doing because his personal integrity is beyond reproach?

That India is an economic mess is known all over the world. What is not yet public is that the malaise was because of the wrong decisions which president Pranab Mukherejee took when he was Union finance minister from January 2009 to mid-2012 and also when finance minister P Chidambaram was heading the ministry nearly till the end of 2008 and before.

Mukherjee lives in the luxuries of Rashtrapati Bhavan and Chidambaram shields himself behind tall promises he still makes to mend the economy. Both of them are accountable. They should tell why they took the steps which disturbed the rhythm of progress. Because of lack of transparency in the affairs of government, only a handful of people know about the blunders the two committed.

One of the decisions taken by Mukherjee was to impose the Rs 1200 crore tax with retrospective effect on a foreign mobile company. After having lost the case in the Supreme Court on September 8, 2010, the government promulgated an ordinance before amending the Finance Act 2012. The retrospective clause in the act has scared away foreign investment which India badly needs. A bagful of concessions has not brought the Walmart yet to the Indian soil. Foreign investors have withdrawn a large sum of money which they had invested. In a few weeks, as much $ 200 billion has reportedly gone out. The outflow has not stopped yet.

Prime minister Manmohan Singh did not anticipate the repercussions. In fact, after seeing the mess Chidambaram had created in 2008, the prime minister should have taken over the finance ministry himself because of his expertise in economic matters. Unfortunately, his own record as coal minister does not hold promise but the prime minister would have done better in finance. India should have been exporting coal, as it did, instead of importing it. Manmohan Singh may not be personally responsible for the corruption in the allotment of coal blocks. But the bungling runs into thousands of crores of rupees. The full story may not yet come out because some files are missing. The government has admitted this before the Supreme Court.

According to CBI as many as 157 files are missing. The missing files reportedly have some letters and noting on the allotment of coal blocks. The prime minister cannot absolve himself of the responsibility that he was not the custodian of the files. He was in charge of the coal portfolio. A top CBI official, who is probing into the scandal, has said that there may be a need to ‘examine’ the prime minister, who was in charge of the ministry from 2006 to 2009. Could the prime minister have connived at what the ministry had been doing because his personal integrity is beyond reproach?

Foreign investment is not one of the three main pillars of the Washington Consensus,but it is a key part of the new globalization. According to the Washington Consensus, growth occurs through liberalization, "freeing up"markets. Privatization, liberalization, and macrostability are supposed to create a climate to attract investment, including from abroad. This investment creates growth. Foreign business brings with it technical expertise and access to foreign markets, creating new employment possibilities. Foreign companies also have access to sources of finance, especially important in those developing countries where local financial institutions are weak. Foreign direct investment has played an important role in many—but not all—of the most successful development stories in countries such as Singapore and Malaysia and even China.----------------Having said this, there are some real downsides. When foreign businesses come in they often destroy local competitors, quashing the ambitions of the small businessmen who had hoped to develop homegrown industry. There are many examples of this. Soft drinks manufacturers around the world have been overwhelmed by the entrance of Coca-Cola and Pepsi into their home markets.Local ice cream manufacturers find they are unable to compete with Unilevers ice cream products.---------------Perhaps of greatest concern has been the role of governments, including the American government, in pushing nations to live up to agreements that were vastly unfair to the developing countries, and often signed by corrupt governments in those countries. In Indonesia, at the 1994 meeting of leaders of APEC (Asia-Pacific Economic Cooperation) held at Jakarta, President Clinton encouraged American firms to come into Indonesia. Many did so, and often at highly favorable terms (with suggestions of corruption "greasing" the wheels—to the disadvantage of the people of Indonesia). The World Bank similarly encouraged private power deals there and in other countries, such as Pakistan. These contracts entailed provisions where the government was committed to purchasing large quantities of electricity at very high prices (the so-called take or pay clauses). The private sector got the profits; the government bore the risk. That was bad enough. But when the corrupt governments were overthrown (Mohammed Suharto, in Indonesia in 1998, Nawaz Sharif in Pakistan in 1999), the U.S. government put pressure on the governments to fulfill the contract, rather than default or at least renegotiate the terms of the contract. There is, in fact, a long history of "unfair" contracts, which Western governments have used their muscle to enforce.--------The international financial institutions tended to ignore the problems I have outlined. Instead,the IMF's prescription for job creation—when it focused on that issue—was simple: Eliminate government intervention (in the form of oppressive regulation), reduce taxes, get inflation as low as possible, and invite foreign entrepreneurs in. In a sense, even here policy reflected the colonial mentality described in the previous chapter: of course, the developing countries would have to rely on foreigners for entrepreneurship. Never mind the remarkable successes of Korea and Japan, in which foreign investment played no role. In many cases,as in Singapore, China, and Malaysia, which kept the abuses of foreign investment in check, merit played a critical role, not so much for the capital(which, given the high savings rate, was not really needed) or even for the entrepreneurship, but for the access to markets and new technology that it brought along.

In an International Chamber of Commerce report, both Pakistan and India have been clubbed together in "below average openness" section with regard to trade openness. In the ICC report, India is ranked 64 with trade openness score of 2.5 which puts it in "Below Average Openness". Pakistan is not too far and placed at 69 position with an aggregate score of 2.1.

The only difference between the two countries is that Indian government, over the period of time, has built adequate protection mechanism by employing range of tariff and non tariff barriers. With the result that now every sensitive sector in India like automotive, agriculture, textiles and pharmaceuticals are now adequately protected by means of WTO compliant tariff and non tariff barriers.

On the other hand, Pakistan Government has not done enough so far to protect its critical sectors and as a result they remain highly exposed in case Ministry of Commerce decides to open trade with India. The ICC grades nations in four broad categories: trade openness, trade policy regime, openness to foreign direct investment (FDI), and infrastructure open for trade.

According to stakeholders, it makes it a very interesting study for someone in our commerce ministry as to how India is protecting its local auto industry. Importer needs to acquire certain permissions from Indian government for importing CBU vehicles into India which requires that the incumbent has to go through a long bureaucratic process whereas in Pakistan anyone can import any vehicle new or used. ----------It is worth mentioning here that Bharat IV emission is considered technical barrier to trade by other competitive industries in the world because of its uniqueness for it requires vehicles to be produced specifically for Indian market. Another national trade barrier (NTB), which is still not addressed, is the restricted entry to Pakistani nationals which is something Indians have always trumpeted to be relaxed but no major development has been seen in this regard. Pakistanis have only three entry points into India: Mumbai/Delhi/Chennai (By Air), Attari / Munabao (By Train) and Attari (By Bus).

Interestingly while the points of entry for individual and cars are restricted the checking authorities are situated in entirely different cities which becomes difficult for foreign companies to pursue their products case. These smartly and intelligently placed NTBs are not only difficult to deal with but also impossible to match also. Our exports have, therefore, seen negligible increase in the last 16 years.

Stakeholders said cement industry can serve as an eye opening example, where exports, despite having good reputation and high demand in Indian market, have been failing to gather pace and witnessing a continuous contraction due to non-resolution of NTBs which stand in the way of increase. According to All Pakistan Cement Manufacturers Association (APCMA) statistics, cement exports to India stood at 786,672 tons in 2007 to 08, a number which witnessed steady decline to reach 722,968 tons in 2009 to 10. In 2010 to 2011, cement exports to India further decreased to 590,104 tons despite talks on removing the negative trade list between the two countries. However, exports recorded a slight increase in 2011 to 2012, reaching to 605,453 tons. FY 2012-2013 ended with lowest exports figure of 482,215 tons, showing negative growth in cement exports by 20.35 percent.

Pakistan is currently contemplating to grant non-discriminatory nation status (equivalent to MFN status) to India in its bilateral trade. It is hoped that reciprocal gestures by India will lead to the shortening of its SAFTA Sensitive List and give access to Pakistani agricultural and textile products, while simultaneously relaxing its non-tariff barriers that are applied more strictly on imports from Pakistan.

Presently, Pakistan maintains a Negative List with respect to imports from India. This list includes 1,209 tariff lines. Despite this restriction, Indian exports to Pakistan were $2.06 billion compared to only $542 million exported by Pakistan to India in FY13. Therefore, India enjoys a large trade surplus of $1.52 billion with respect to Pakistan.

Major Indian exports to Pakistan include cotton, oil cakes, vegetables, synthetic yarn, fabrics and chemicals. The share of agricultural exports to Pakistan was 55 percent. There have also been years like FY11 when Pakistan imported $337 million worth of sugar from India. On the other hand, Pakistans major exports to India in FY13 included minerals, dates, cement, chemicals and petroleum products. The share of agricultural items to India was only 21 percent.

There has been a dramatic reversal in the pattern of trade between India and Pakistan. At the time of partition, Pakistans exports to India primarily comprised of agricultural products like cotton and wheat. Now, India is the major exporter of Pakistan of agricultural commodities like cotton, vegetables, sugar, animal and poultry feed, etc.

What explains the fundamental change in relative comparative advantage in agriculture between the two countries? The view strongly put forward by the Farmers Associations of Pakistan is that this is primarily due to two factors.

First, India subsidizes its agriculture much more than Pakistan, thereby making it artificially competitive. Second, Pakistan provides little or no protection to its farmers though import tariffs.

Lets examine the validity of these two explanations below.

On the subsidy issue, the latest information, as of FY12, is that India subsidised fertiliser use (all types) to the tune of $15,171 million. Other subsidies went to irrigation ($6,303 million), electricity consumption by farmers ($7,326 million) and to other inputs like seed, tractors, crop insurance, etc ($8,832 million). The total agricultural subsidy bill for India in FY12 is estimated at $37,362 million, equivalent to 2.2 percent of the GDP.

The corresponding estimates for subsidies in Pakistan in FY12 are $356 million on fertiliser (net of the GST on the input). Other subsidies are for irrigation ($193 million), electricity and others ($342 million). The total subsidy aggregates to $897 million, which is 0.4 percent of the GDP. Therefore, controlling for the size of the economy, Indian subsidies to agriculture are over five times as much as of Pakistan. Consequently, yields are somewhat higher by 10 to 27 percent in many crops.

The second explanation is also valid. Pakistans imports of cotton, tomatoes and onions are all importable duty free from any source, including India. This is primarily due to strong trading and industrial lobbies in the country. The cost of production of different crops in India is about 10 to 15 percent lower on average than in Pakistan; mainly due to substantially larger subsidies.

Clearly, if a level playing field is to be provided to Pakistani farmers, then there is a strong case for introduction of a minimum MFN duty on agricultural products of 10 to 15 percent.

In addition, Pakistan must emphasise to India that the trade imbalance has been magnified by the fact that many of its potential exports to India, of agricultural products and textiles especially, are in Indias Sensitive List of SAFTA. Also, both countries must ensure that all non-tariff barriers are not applied in a discriminatory manner towards each other.

In light of the recent negotiations taking place between the government of Pakistan and India on trade normalisation, a study has been conducted by the Pakistan Business Council (PBC) titled ‘Preliminary analysis of Pakistan and India trade and a viable roadmap for trade liberalisation’.The study identifies areas of potential growth opportunities and urges the government of Pakistan to negotiate reciprocal treatment with its Indian counterparts to achieve level playing field in trade on both sides.The study has estimated a potential bilateral trade of $18 billion using current trade statistics between Pakistan and India. Of this potential, $3.6 billion is Pakistan’s potential to export to India, whereas the balance represents India’s potential export to Pakistan.Recent talks suggest that once Pakistan grants Most Favoured Nation (MFN) or Non-discriminatory Market Access (NDMA) status to India and opens the Wagah-Attari land route for all items (137 currently allowed); India will reduce its sensitive list down to 100 select items.With the grant of MFN, South Asian Free Trade Area (Safta) regime will also kick in where Pakistan will give concessionary treatment to India along all products except items in Pakistan’s sensitive list.The PBC study, however, argues that Pakistan cannot benefit from a simple pruning down of India’s sensitive list, as majority of Pakistan’s potential to export lies along products that are not protected by India under its sensitive list.It is in fact, India’s Para-tariffs and strategically placed non-tariff barriers that are in some cases specific to sectors such as textile, agriculture and automobiles that largely restrict market access for Pakistani exporters.At present, Pakistan protects its domestic interests through the sensitive list and the negative list but the latter will no longer be operative once MFN to India is granted. The concerns of the agricultural lobby and domestic producers, particularly automobiles and pharmaceuticals thus appear to be reasonable.With only a limited number of products allowed on the sensitive list under the Safta regime, the cheaper Indian products could hurt domestic interests.India on the other hand is expected to continue to protect its interests with its systematic network of Para-tariffs, Non-tariff barriers and subsidies, not offering reciprocal treatment to Pakistan.

Excerpt of Wall Street Journal interview with President of Yamaha Motors in Japan:

WSJ: What about in South Asia? Mr. Yanagi: We want to expand business in Pakistan and Bangladesh as soon as possible. We had a production venture in Pakistan but we dissolved it five years ago. We are now planning to begin local production again, on our own this time.

In Bangladesh, we import motorcycles from our plant in India on a small scale, but we are studying now the best way of running operations because of rising tariff barrier there.

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About Me

I am the Founder and President of PakAlumni Worldwide, a global social network for Pakistanis, South Asians and their friends. I also served as Chairman of the NEDians Convention 2007. In addition to being a South Asia watcher, an investor, business consultant and avid follower of the world financial markets, I have more than 25 years experience in the hi-tech industry. I have been on the faculties of Rutgers University and NED Engineering University and cofounded two high-tech startups, Cautella, Inc. and DynArray Corp and managed multi-million dollar P&Ls. I am a pioneer of the PC and mobile businesses and I have held senior management positions in hardware and software development of Intel’s microprocessor product line from 8086 to Pentium processors. My experience includes senior roles in marketing, engineering and business management. I was recognized as “Person of the Year” by PC Magazine for my contribution to 80386 program. I have an MS degree in Electrical engineering from the New Jersey Institute of Technology.
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